Price discovery in the South African stock index futures market

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).