MEASURING CASH-FUTURES TEMPORAL EFFECTS IN THE UK USING PARTIAL ADJUSTMENT FACTORS

The nature and extent of intertemporal adjustments across stock index futures and cash markets in the UK are investigated in terms of partia l adjustment factors. This approach affords the means of establishing both differential price movements in these markets and, additionally, providing a readily interpretable measure of the degree of such relati ve price movements. Analytic expressions are developed for jointly mea suring the partial adjustment factors in cash and futures markets usin g a partial adjustment with noise model. The measures are adjusted for non-synchronous trading and asymptotic sampling variances derived, Ad justment factors are estimated using daily data over the period 1984-1 992, with differencing intervals ranging from one to thirty days, Pric e adjustments were found to be fuller in futures markets, particularly over shorter differencing intervals. Corrections for non-synchronous effects in the cash market increased the magnitude of price adjustment , as did the exclusion of data from the 1987 crash period. (C) 1998 El sevier Science B.V. All rights reserved.