Cointegration of South African index futures contracts and their underlying spot market indices

This study examines the temporal pricing relationship between four South African index futures contracts and their underlying spot market indices. In frictionless and efficient markets, price changes in the two markets should be perfectly contemporaneously correlated. Any evidence of a lead–lag relationship between spot prices and futures prices therefore provides insight into the relative informational efficiency of the market. The paper provides evidence that the JSE stock index futures contracts are cointegrated with the spot market. Fitted error correction models find that the stock index futures price changes lead those of the underlying spot index by up to three days in reflecting new information.