Abstract
This paper focuses on dynamic interactions of equity prices among theoretically related assets. It explores the existence of intra-day non-linearities in the FTSE 100 cash and futures indices. We test if the introduction of the electronic trading systems in the London Stock Exchange in 1997 and in the London International Financial Futures and Options Exchange (LIFFE) in 1999 has eliminated the non-linear dynamic relationship in the FTSE 100 markets. We show that the introduction of the electronic trading systems in the FTSE 100 markets has increased the efficiency of the markets by enhancing the price discovery process, namely by facilitating the increase of the speed of adjustment of the futures and cash prices to departures of the mispricing error from its non-arbitrage band. Nevertheless, the automation of the markets has not completely eliminated the non-linear properties of the return series.
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