The Korean Journal of Applied Statistics (응용통계연구)

The Korean Statistical Society (한국통계학회)
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Correlation between the Stock and Futures Markets by Timescale

  • Received : 2012.08.22
  • Accepted : 2012.11.14
  • Published : 2012.12.31
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Abstract

This paper examines the relationship between the stock and futures markets in terms of lead-lag relationship, correlation and the hedge ratio using wavelet analysis. The basic finding is that the relationship between the two markets significantly depends on the time-scale. First, there is a feedback relationship between the stock and futures markets in the long-run scale; however, weaker evidence is observed in shorter-run scales. Second, wavelet correlation between the two markets increases for a longer time scale. Third, the hedge ratio and the effectiveness of hedging strategies increase as the investment horizon gets longer. The results in this paper indicate that the stock and futures series are perfectly correlated in the long run and are tied together over long horizons.

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References

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