This paper examines the price discovery role of the KOSPI 200 futures index for its cash index using a five-minute, intraday data. We use the cointegration analysis and error correction model. Since conitegration implies that each series can be represented by an error correction model that includes last period's equilibrium error as well as lagged values of the first differences of each variable, temporal causality can be assessed by examining the statistical significance, and relative magnitudes, of the error correction coefficients and the coefficients on the lagged variables.
First, the cash and futures markets were cointegrated so that an error correction model for each series was appropriate. Futures prices tended to lead the cash index by about thirty-five minutes and the lead effect of the cash index was disappeared in five minutes.
Second, we examined differences in the temporal relations between the percentage change in futures prices and stock index returns as the futures market matured. Trading volume in the cash and futures market increased since the opening of futures market and futures prices led the cash index more intensively. But, the lead time becomes shorter. Even though stocks were traded actively in 1998, futures led the cash index as above. Through these results, we showed that the infrequent trading effect did not explain the futures-to-spot lead effect entirely.
Third, we compared estimates of the lead and lag relationships on the expiration day with those on days prior to expiration using a minute-to-minute data. The futures-to-spot lead time on the expiration day was at least as long as other days prior to expiration, suggesting that "expiration day effects" did not demonstrate a temporal character substantially different form earlier days. Thus, while arbitrage activity may be presumed to be the greatest at expiration, such arbitrage transactions were not sufficiently strong or pervasive to alter the empirical price relationship for the entire day.
