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A trading strategy based on the lead–lag relationship between the spot index and futures contract for the FTSE 100

Brooks, C., Rew, A. G. and Ritson, S. (2001) A trading strategy based on the lead–lag relationship between the spot index and futures contract for the FTSE 100. International Journal of Forecasting, 17 (1). pp. 31-44. ISSN 0169-2070

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To link to this item DOI: 10.1016/S0169-2070(00)00062-5

Abstract/Summary

This paper examines the lead–lag relationship between the FTSE 100 index and index futures price employing a number of time series models. Using 10-min observations from June 1996–1997, it is found that lagged changes in the futures price can help to predict changes in the spot price. The best forecasting model is of the error correction type, allowing for the theoretical difference between spot and futures prices according to the cost of carry relationship. This predictive ability is in turn utilised to derive a trading strategy which is tested under real-world conditions to search for systematic profitable trading opportunities. It is revealed that although the model forecasts produce significantly higher returns than a passive benchmark, the model was unable to outperform the benchmark after allowing for transaction costs.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:35962
Uncontrolled Keywords:Stock index futures; FTSE 100; Error correction model; Trading rules; Forecasting accuracy; Cost of carry model
Publisher:Elsevier

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