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).
|Number of pages||12|
|Journal||International Research Journal of Finance and Economics|
|Publication status||Published - Dec 2009|
- FTSE/JSE top 40
- Price discovery
- South Africa
- Stock index futures