An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand

•Analyzing the lead–lag relationship between the spot market and futures market•Due to market imperfections, one of these two markets may reflect information faster.•Lagged changes in spot price have a leading effect to the changes in futures price.•TDEX is used instead of SET50 index to see any changes in the lead–lag relationship.•Result shows that there is a leading effect between TDEX and SET50 index futures.

This study investigates whether a lead–lag relationship exists between the spot market and the futures market in Thailand during the period 2006 through 2012. In a rational, efficient market, returns on derivative securities and their underlying assets should be perfectly contemporaneously correlated. However, due to market imperfections, one of these two markets may reflect information faster. Using daily data, our results show that there is a price discovery in the Thailand futures market. We find that lagged changes in spot prices lead changes in futures prices. Our results are robust to the use of an alternative equity index. Our results show that the error correction model, which utilizes the traditional linear model, is found to be the best forecasting model. Furthermore, we find that a trading strategy based on this model outperforms the market even after allowing for transaction costs.