The linkages of S & P 500 stock index and S & P 500 stock index futures prices during October 1987

Abstract

Intraday minute-by-minute data for the entire month of October 1987, were used to investigate the linkages between the S & P 500 index futures market and the underlying cash market before and after the crash. This study used cointegration and error-correction estimation techniques, and found, with the exception of October 16 and 19, that the two markets were highly cointegrated and operated as one market for most trading days in the month of October. Further, the results show that the stock and futures markets converged immediately after the crash and that the price-discovery process originated in the futures market instead of the stock market, as the two markets are linked by index arbitrage. Finally, the evidence also suggests that the delinkage of the futures market from its underlying stock market started on Friday, October 16, implying that the crash originated in the United States and not in Asia as suggested by Roll (1988)