Interaction between Single Stock Futures and the Underlying Securities: A Cross-Country Analysis

We investigate the lead-lag relationship between price movements of single stock futures (SSFs) and spot stock markets in four organized markets, namely, Korea Exchange, National Stock Exchange of India, Warsaw Stock Exchange, and Moscow Exchange. Employing a vector error correction model and using daily data of 192 single stock futures-stock pairs, we find that, in the long-run, spot market leads futures market in 30% of the sample. Leading role of the SSF market in the long-run becomes evident in only 5% of the sample. Regarding the short run dynamics, leading roles of SSFs and stocks are more balanced; the SSF market leads the spot market in 29%, whereas the spot market leads the SSF market in 22% of the sample. We find that relative trading activity (SSF volume/spot volume) and maturity/age of the SSF have a significant positive effect on the leading role of the SSFs.