Munich Personal RePEc Archive

Multi-scale Lead-Lag Relationship between the Stock and Futures Markets: Malaysia as a Case Study

Jusoh, Hashim and Bacha, Obiyathulla and Masih, Abul Mansur M. (2014): Multi-scale Lead-Lag Relationship between the Stock and Futures Markets: Malaysia as a Case Study.

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Abstract

There is a considerable literature relating to a lead-lag relationship between the stock index (spot) and stock index futures markets in developed countries compared to emerging countries. The analysis of this relationship in an emerging market based on a different investment horizon is significant for both academic and trading purposes. In this study, we analyze the lead-lag relationship between stock index and stock index futures in Malaysia. We use a new approach based on the Continuous Wavelet Transform (CWT) and the Discrete Wavelet Transform (DWT). The results show variability of the lead-lag relationship across frequency ranges and time scales, and also occasional in-phase behaviour between both markets. The relationships between stock index and stock index futures are shown to evolve over time with non-homogeneous trends across different time scales. Some strong correlations have been found in lead-lag interactions between the markets. The result from this study would provide a better picture of a current derivatives market in emerging countries, specifically in Malaysia. Hopefully it will shed some light in furthering the development of Islamic equity futures within the Islamic capital market, therefore will encourage Islamic asset managers to use derivatives as a hedging tool to protect their funds’ value.

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