A partially linear approach to modelling the dynamics of spot and futures prices

Jürgen Gaul and Erik Theissen

In this paper we consider the dynamics of spot and futures prices in the presence of arbitrage. We propose a partially linear error correction model where the adjustment coefficient is allowed to depend non-linearly on the lagged price difference. We estimate our model using data on the DAX index and the DAX futures contract. We find that the adjustment is indeed nonlinear. The linear alternative is rejected. The speed of price adjustment is increasing almost monotonically with the magnitude of the price difference. -- Futures Markets ; Cointegrated Systems ; Partially Linear Models ; Nonparametric Methods

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Year of publication:	05 Mar. 2008
Other Persons:	Gaulke, Jürgen (contributor) ; Theissen, Erik (contributor)
Publisher:	Frankfurt, Main : Center for Financial Studies
Subject:	Börsenkurs \| Share price \| Aktienindex \| Stock index \| Index-Futures \| Index futures \| Arbitrage \| Kointegration \| Cointegration \| Partielle kleinste Quadrate \| Partial least squares \| Nichtlineare Regression \| Nonlinear regression \| Schätzung \| Estimation \| Theorie \| Theory \| Deutschland \| Germany