Non-Linear Dynamics and Competing Behavioural Interpretations: Evidence from Intra-Day FTSE-100 Index and Futures Data’

David Gordon McMillan, A Speight

    Research output: Contribution to journalArticlepeer-review

    29 Citations (Scopus)

    Abstract

    Extant empirical research has reported nonlinear behavior within arbitrage relationships. In this article, the authors consider potential nonlinear dynamics within FTSE-100 index and index-futures. Such nonlinearity can be rationalized by the existence of transactions costs or through the interaction between informed and noise traders. They consider several empirical models designed to capture these alternative dynamics. Their empirical results provide evidence of a stationary basis term, and thus cointegration between index and index-futures, and the presence of nonlinear dynamics within that relationship. The results further suggest that noise traders typically engage in momentum trading and are more prone to this behavior type when the underlying market is rising. Fundamental, or arbitrage, traders are characterized by heterogeneity, such that there is slow movement between regimes of behavior. In particular, fundamental traders act more quickly in response to small deviations from equilibrium, but are reluctant to act quickly in response to larger mispricings that are exposed to greater noise trader price risk. (c) 2006 Wiley Periodicals, Inc.

    Original languageEnglish
    Pages (from-to)343-368
    Number of pages26
    JournalJournal of Futures Markets
    Volume26
    DOIs
    Publication statusPublished - Apr 2006

    Keywords

    • TRANSITION AUTOREGRESSIVE MODELS
    • STOCK-MARKET RETURNS
    • TIME-SERIES MODEL
    • ERROR-CORRECTION
    • INVESTOR PSYCHOLOGY
    • ARBITRAGE
    • NOISE
    • PREDICTABILITY
    • COINTEGRATION
    • ADJUSTMENT

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