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Statistical Evidence For Short-Run Dynamics Between Spot And Futures Equity Markets And Economic Value Of Basis Trade Strategies

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Executive Summary

The aim of this paper is to examine the existence of short run lead-lag effects between the spot and the futures market in the German stock exchange and particularly the DAX index, over the period 1/2000 - 12/2003, using in-tradaily data. As long as such relationships are established authors investigate the economic value of spread trades motivated by the abovementioned relation-ships. To model the lead-lag effects they employ the multivariate Threshold Regression Model (TRM) of Tsay (1998) and for the economic value they use a reduced version of the methodology introduced by Fleming et al. (2001). The main finding is that there exist quite robust short run effects between the two markets across time.

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