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



Author(s)

Jude W. Taunson, Mohd. Fahmi Bin Ghazali, Minah Japang and Abd. Kamal Bin Char

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DOI:10.17265/1548-6583/2018.10.003

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 over-react to information, more so once thin trading effects are taken into account. Thus, traders in using the FKLI as a price discovery tool must consider information from the underlying market to arrive at the equilibrium price.

lead-lag relations, high frequency data, futures market