Price discovery in the South African stock index futures market

Christos Floros

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    Abstract

    This paper examines the price discovery between futures and spot markets in South Africa over the period 2002 to 2006. We employ four empirical methods: (i) a cointegration test, (ii) a Vector Error Correction model, (iii) a Granger causality test, and (iv) an Error Correction model with TGARCH errors. Empirical results show that FTSE/JSE Top 40 stock index futures and spot markets are cointegrated. Furthermore, Granger causality, VECM and ECM-TGARCH(1,1) results suggest a bidirectional causality (feedback) between futures and spot prices. We show that futures and spot play a strong price discovery role (FTSE/JSE Top 40 futures prices lead spot prices and vice versa).
    Original languageEnglish
    Pages (from-to)148-159
    Number of pages12
    JournalInternational Research Journal of Finance and Economics
    Volume34
    Publication statusPublished - 2009

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