The issue of price discovery on futures and spot markets and the lead-lag relationship are topics of interest to traders, financial economists and analysts. Although futures and spot markets react to the same information, the major question is which market reacts first. In this paper it is attempted to review lead/lag relationships between the NSE Nifty stock market index (in India) and its related futures and options contracts including interrelation between the derivatives markets. Returns are examined at hourly intervals across a trading day taking five hourly sub-periods for a sample period between July 2001 and March 2007. The relative rates of price discovery across the cash and derivative markets are assessed with multiple regression models. It is found that both the index futures and index options contracts lead the cash index. Call options market tends to lead the cash market by up to one hour. A feedback relationship is found between the cash market and the put option market with a lead and lag of up to an hour. A similar but stronger relationship is reported for the linkage between options and futures markets, with call options leading futures but futures leading puts. It is hypothesized that informed traders with bullish expectations wishing to gain leverage from the options market will buy calls or, with greater risk, sell puts. As market sentiment was bullish for most of the sample period covered, this could explain the lead of the call market reported. This paper also makes a comprehensive review of lead-lag relationships.
Futures, stock index, options, NSE Nifty
