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.

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JEL classification: C22,C53,G14,G15