Intraday Lead-Lag Relationship between Index Futures and Stock Index Markets: Evidence from Malaysia

Abstract

This paper investigates the lead-lag relationship between the stock index futures (known as FKLI) and its underlying index, the Kuala Lumpur Composite Index (KLCI) in the emerging Malaysian market. Using 15-second interval data, cross-correlation, and the partial adjustment model, we find a bi-directional asymmetric lead-lag relationship and that the KLCI's lead over FKLI is much stronger. The evidence also suggests that the KLCI returns overreact to information, more so once thin trading effects are considered. Overall, the evidences suggest that traders prefer to exploit stock specific information in the underlying market despite the advantages of trading the index futures.

The lead–lag relationship between spot and futures prices: Empirical evidence from the Indian commodity market

“…In the past, studies on lead-lag relationships were conducted mostly in developed economies, with the United States of America being the preferred source of data. More recently, there has been an increase in studies conducted in emerging economies such as Turkey (Basdas, 2009), China (Demir et al, 2019;Gong et al, 2016;Jiang et al, 2019;Ren et al, 2019;Wang et al, 2013), Greece (Floros and Vougas, 2007;Kavussanos et al, 2008), India (Choudhary and Bajaj, 2012;Debasish, 2009;Debasish and Mishra, 2008;Jackline and Deo, 2011), Indonesia (Rusmanto et al, 2016), Korea (Kang et al, 2006;Kim et al, 2009), Malaysia (Taunson et al, 2018), and Thailand (Judge and Reancharoen, 2014). However, there are still very few studies on lead-lag relationships in emerging economies.…”