An empirical study of lead-lag relationship between spot and futures markets in three developing South East Asian countries Malaysia, Thailand and Singapore

This dissertation empirically investigates the potential lead lag relationship between spot and future markets in three South East Asian countries, namely Malaysia, Thailand and Singapore. It attempts to prove whether the lead–lag relationship exist between the two markets in each country individually and whether future market returns lead spot market returns in these countries. | Similar to Granger causality test, Johansen cointegration (1988) test has also been popular in the literature. Many researchers such as Shyy et. al (1996), Nieto et al. (1998), Choudhary & Bajaj (2012) did use this test to investigate the long term relationship between spot and future markets. Johansen cointegration approach gains popularity because of its benefits. The most important advantage is that it does not only generate the single vectors but also generate the whole matrix of integrate ones; therefore this approach may enable more persistent estimation (Brooks, 2008). To illustrate, Johansen test has advantages comparing to other test such as Engle - Granger test in the sense that it has the ability to detect multiple cointegrating vectors. Therefore, it can avoid the problem of having to choose one variable as dependent variable as well as the issues of carrying errors from one step to another whereas in Engle – Granger test, selecting different dependent variable could result in different results (Amstrong, 2001). Futhermore, Choudhary & Bajaj (2012) considered that Johansen cointegration test could be the most powerful test among various tests available. Because of all reasons listed above, Johansen cointegration test is used in this study to investigate any potential long term relationship between spot market and future market returns in three countries.

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