Lead Lag Relationship and Price Discovery in Turkish Stock Exchange and Futures Markets

Abstract

In perfectly efficient financial markets, new information should be impounded simultaneously into the cash and futures markets. Real world institutional factors, however, often create an emprical lead-lag relationship between alternative securities price changes. Current futures prices in one futures market would lead the change of current spot prices. Price discovery can be defined as lead-lag relationship and information flows between two markets. This study examines the price discovery and lead-lag relationship between stock index (ISE 100) and stock index futures markets in Turkey over the period 2006-2011. We test our hypotheses with daily data in the context of a Vector Error Correction model that also incorporates possible co-integration between the futures and spot market. The evidence supports that the futures market in Turkey is a useful price discovery tool. Key words: Causality, error correction, price discovery, futures, stock exchange.