Price discovery in stock index: an AR - -ECM approach in Taiwan case

In this study, we examine the lead-lag effect between stock index futures and its spot markets in Taiwan by employing a newly developed econometrics method, AR - -ECM approach. The advantage of applying such technique is to avoid earlier ambiguous causality testing procedure, and it can provide more clearly representation of a stable unidirectional price discovery process. By verifying intraday data, we find that the futures prices lead spot markets for about 30 min during the year 2004. Moreover, during the presidential election period which caused political turbulent in Taiwan, the function of future market supposed as the dominated role of price discovery becomes futility. Such findings are consistent with the 'surprising election outcomes' phenomenon. Reprinted by permission of Springer