Analysis of the Lead-Lag Relationship on South Africa capital market

Rešovský, Marcel and Gróf, Marek and Horváth, Denis and Gazda, Vladimír (2014): Analysis of the Lead-Lag Relationship on South Africa capital market.

Abstract

Despite the efficient market hypothesis (EHM), lead-lag relationships can be observed mainly between financial derivatives and underlying asset prices, prices of large and small companies, etc. In our paper, we examined the lead- lag relationship between prices of open ended funds and an all-share index as a representative of the capital market. Along with more traditional methods of using cross correlations, partial correlation and Toda-Yamamoto causality tests, we also analysed the speed of adjustment of assets to their intrinsic values and identified the most prevalent lag using rolling time windows. The analysis was performed using data from the South Africa capital market.

• Item Type: MPRA Paper
• Language: English
• Keywords: lead-lag relationship, open ended fund, all-share index, causality, efficient market hypothesis
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Basher, S. A. and Sadorsky, P. (2006). Day of the week effects in emerging stock markets. Applied Economics Letters, 13(10):621-628.

Chiao, C., Hung, K., and Lee, C. F. (2004). The price adjustment and lead-lag relations between stock returns: microstructure evidence from the Taiwan stock market. Journal of Empirical Finance, 11(5):709-731.

Chordia, T. and Swaminathan, B. (2000). Trading Volume and Cross-Autocorrelations in Stock Returns. The Journal of Finance, 55(2):913-935.

Conover, C. M. and Peterson, D. R. (1999). The Lead-Lag Relationship between the Option and Stock Markets prior to Substantial Earnings Surprises and the Effect of Securities Regulation. Journal of Financial and Strategic Decisions, 12(1).

Crutchfield, J. P. and Young, K. (1989). Inferring statistical complexity. Physical Review Letters, 63(2):105-108.

De Medeiros, O. R., De Oliveira, G. R., and Van Doornik, B. F. (2009). Testing for Lead-Lag Effects Between the American and the Brazilian Stock Markets. Available at SSRN 1365322.

Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 5(2):383-417.

French, K. R. (1980). Stock returns and the weekend effect. Journal of Financial Economics, 8(1):55-69.

Hou, K. (2007). Industry Information Diffusion and the Lead-Lag Effect in Stock Returns. Review of Financial Studies, 20(4):1113-1138.

Keim, D. B. (1983). Size related anomalies and stock return seasonality: Further empirical evidence. Journal of Financial Economics, 12(1):13-32.

Lakonishok, J. and Smidt, S. (1988). Are Seasonal Anomalies Real? A Ninety-Year Perspective. Review of Financial Studies, 1(4):403-425.

Lo, A. W. and MacKinlay, A. C. (1990). When are Contrarian Profits Due to Stock Market Overreaction? Review of Financial Studies, 3(2):175-205.

Malkiel, B. G. (2003). The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives, pages 59-82.

Theobald, M. and Yallup, P. (1998). Measuring cash-futures temporal effects in the UK using partial adjustment factors. Journal of Banking & Finance, 22(2):221-243.

Toda, H. Y. and Phillips, P. C. (1993). Vector Autoregressions and Causality. Econometrica: Journal of the Econometric Society, 1367-1393.

Toda, H. Y. and Yamamoto, T. (1995). Statistical inference in vector autoregressions with possibly integrated processes. Journal of Econometrics, 66(1):225-250.