COINTEGRATION AND INTERMARKET PRICE CHANGE RELATIONS IN THE EXCHANGE MARKET
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Using transactions data on the British Pound, Deutsche Mark, and Japanese Yen in 1994, this study examines the lead/lag relations among the currency spot, option, futures, andfutures option markets. This study is important due to rhe scope ofmarket linkages examined and the number ofcurrencies considered. Empirical results show that futures option trading leads futures trading and (spot) option trading,futures trading leads spot trading and (spot) option trading, and spot trading leads (spot) option trading. Thus new information seems to flow into futures option marketfirst,followed byfutures market, spot market, and (spot) option market. Arbitrage profits may be possible, but transaction costs and other market impe1fections may inhibit any such profiteering.
Abstract
Using transactions data on the British Pound, Deutsche Mark, and Japanese Yen in 1994, this study examines the lead/lag relations among the currency spot, option, futures, andfutures option markets. This study is important due to rhe scope ofmarket linkages examined and the number ofcurrencies considered. Empirical results show that futures option trading leads futures trading and (spot) option trading,futures trading leads spot trading and (spot) option trading, and spot trading leads (spot) option trading. Thus new information seems to flow into futures option marketfirst,followed byfutures market, spot market, and (spot) option market. Arbitrage profits may be possible, but transaction costs and other market impe1fections may inhibit any such profiteering.