The Lead Lag Relationship Between Spot and Futures Markets in the Energy Sector: Empirical Evidence From Indian Markets

Abstract

The study aims at finding the intraday Lead-Lag relationship between Spot and Futures Market for Energy Sectors Stocks on which Single Stock Futures (SSFs) is available, by applying 1-min Price Returns for the period ranging from April 1, 2017 to March 31, 2019. The study explores pricediscovery between stock futures and their underlying stocks by applying vector error correction model, Hasbrouck (1995) Information Shares, and Common Factor Component Weights of Gonzalo and Granger (1995). The findings indicate that trades in the Futures Market contribute more to Price-Discovery than Spot Market.

A Multi-market Comparison of the Intraday Lead–Lag Relations Among Stock Index-Based Spot, Futures and Options

“…In summary, the results of the TOP method show that the futures and options exhibit price leadership over the spot market, and the options is ahead of the futures on most trading days in the Chinese mainland market, which are generally in line with the results in Hong Kong and US markets. These conclusions are consistent with Ren et al ( 2019 ), Ahn et al ( 2019 ) and Raju and Shirodkar ( 2020 ).…”

“…In summary, inconsistent with the Efficient Markets Hypothesis (Fama, 1991 ; Shao et al., 2019 ), our research based on high-frequency data suggests that the futures and options exhibit price leadership over the spot market, and the options is ahead of the futures on most trading days in all three markets. These findings complement the work (Ren et al, 2019 ; Ahn et al 2019 ; Raju & Shirodkar, 2020 ) on the dynamic variation of intraday lead–lag relations between the index and its derivatives. In addition, there is a reversal phenomenon of the relation between the derivative and its underlying index, which is different from previous studies and enriches the empirical research in this area.…”

“…The empirical results of our paper indicate that the futures and options exhibit price leadership over the spot market, and the options is ahead of the futures on most trading days in all the three markets, consistent with Ren et al ( 2019 ), Ahn et al ( 2019 ) and Raju and Shirodkar ( 2020 ). Differing from the previous literature, our new findings on the reversal phenomenon of intraday lead–lag relations show that the relation between the derivative and its underlying index reverses when the index return has a significantly larger mean value, and the reversal phenomenon is also observed in the relations between the futures and options.…”

“…The findings of the literature so far are diverse and inconsistent. There are some bivariate analysis showing that the derivatives led its index (Amin & Lee, 1997 ; Tse, 2001 ; Theissen, 2012 ; Fung et al., 2015 ; Ahn et al., 2019 ; Raju & Shirodkar, 2020 ). In contrast, other studies indicate the index played a price guiding role on its associated derivatives (Cao et al., 2014 ; Gaul & Theissen, 2015 ; Zhou & Wu, 2016 ).…”

Investigating long-run cointegration and lead lag relationship between spot and future markets of energy commodities

“…Raju and Shirodkar (2020) [18] have investigated the lead-lag relationship between the spot and futures markets of energy sector stocks on which single stock futures (SSFs) are available and found that future markets leads in price discovery process. Zavadska et al (2018) [21] analyzed the behavior and importance of crude oil in the global economy with a more focus on investigating the lead-lag relationship between the spot and future markets.…”