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The lead-lag relationship between the FTSE100 stock index and its derivative contracts

The lead-lag relationship between the FTSE100 stock index and its derivative contracts
The lead-lag relationship between the FTSE100 stock index and its derivative contracts
This paper examines the lead/lag relationships between the FTSE100 stock market index and its related futures and options contracts, and also the interrelation between the derivatives markets. Both the index futures and index options contracts are found to lead the cash index as predicted. However, the call option market appears to marginally lead both the index futures and the put option market. In the only previous paper to examine the inter-market relationships between a stock index and related futures and options contracts, Fleming et al (Journal of Futures Markets, 16, 353-87, 1996) maintain that relative trading costs determine which market leads. As the trading costs of calls and puts are similar, other factors must be driving the relationships observed in this paper. We hypothesize that informed traders with bullish expectations wishing to gain leverage from the options market will buy calls or, with greater risk, sell puts. As market sentiment was bullish for most of the sample period examined, this could explain the call market leads reported.
0960-3107
385-393
Ap Gwilym, Owain
dbd356d9-b22d-420b-a980-7341f6d52f34
Buckle, Mike
ed97238b-d81d-4a09-883a-312d8dd43796
Ap Gwilym, Owain
dbd356d9-b22d-420b-a980-7341f6d52f34
Buckle, Mike
ed97238b-d81d-4a09-883a-312d8dd43796

Ap Gwilym, Owain and Buckle, Mike (2001) The lead-lag relationship between the FTSE100 stock index and its derivative contracts. Applied Financial Economics, 11 (4), 385-393. (doi:10.1080/096031001300313947).

Record type: Article

Abstract

This paper examines the lead/lag relationships between the FTSE100 stock market index and its related futures and options contracts, and also the interrelation between the derivatives markets. Both the index futures and index options contracts are found to lead the cash index as predicted. However, the call option market appears to marginally lead both the index futures and the put option market. In the only previous paper to examine the inter-market relationships between a stock index and related futures and options contracts, Fleming et al (Journal of Futures Markets, 16, 353-87, 1996) maintain that relative trading costs determine which market leads. As the trading costs of calls and puts are similar, other factors must be driving the relationships observed in this paper. We hypothesize that informed traders with bullish expectations wishing to gain leverage from the options market will buy calls or, with greater risk, sell puts. As market sentiment was bullish for most of the sample period examined, this could explain the call market leads reported.

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Published date: 2001

Identifiers

Local EPrints ID: 35685
URI: https://eprints.soton.ac.uk/id/eprint/35685
ISSN: 0960-3107
PURE UUID: 32a0ae1b-c95a-4267-aa52-0018f10af87d

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Date deposited: 22 May 2006
Last modified: 17 Jul 2017 15:47

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