International price discovery in Finnish stock index futures and cash markets

This paper investigates empirically how the information of the world's stock markets is reflected in the thin Finnish stock index futures and cash markets. The world-wide returns seem to have a significant leading ability for predicting Finnish stock index futures returns. However, this kind of causal relation is not observed between the world-wide and stock market returns. The Finnish stock index futures returns then show significant Granger causality with Finnish stock market returns, the stock market being the lagging one. The relationship is improved by allowing the association between markets to be different for positive and negative returns. The findings of this study suggest short selling restrictions and other market frictions to be a significant factor leading to a delay in the pricing process in the stock market.