Abstract :
The presence of the lead-lag effect where the index futures leads the stock market in responding to new information is indeed a violation of the Efficient Market Hypothesis. Within the context of an efficient market, financial markets are said to react instantaneously and simultaneously towards the arrival of new information. Nonetheless, the existence of the lead-lag effect reaffirms the importance of the indexfutures market in the price discovery process. This paper investigates the relationship between index futures and stock market in Malaysia. The objective of this study is to examine the nature of relationship between returns (and volatility) between the two markets. The study uses daily data from January 2000 to October 2003 as reported by the Kuala Lumpur Stock Exchange and Malaysian Derivatives Exchange. The cross-correlation as well as the multiple regression analysis and the Granger causality test are employed in this study. The results support the presence of the lead-lag effect between the futures index and the stock market in Malaysia where the index futures are found to lead the stock market in responding to new information. However, the presence of the lead-lag effect is not as dominant as the contemporary effect that exists among the returns (and volatility) of the two markets. As such, the two markets seem to junction as an integrated system that is efficient
