The lead-lag relationship between equities and stock index futures marketsaround information releases

This paper documents a strengthening in the lead of stock index futures ret urns over stock index returns around macroeconomic information releases. So me evidence of a strengthening in feedback from the equities market to the futures market and weakening in the lead of the futures market around major stock-specific information releases is also provided. This is consistent w ith the hypothesis that investors with better marketwide information prefer to trade in stock index futures while investors with stock-specific inform ation prefer to trade in underlying stocks. A small weakening in the contem poraneous relationship between stock index futures returns and stock index returns around both types of releases is also documented. This is consisten t with disintegration in the relationship between the two markets associate d with noise induced volatility. One by-product of this study is new compar ative evidence on the performance of adjustments for infrequent trading of index stocks based on a commonly used ARMA technique versus recalculation o f the stock index using quote midpoints. The results suggest that the quote midpoint index performs at least as well as the ARMA adjusted index across the entire sample period, as well as around the different types of informa tion releases. (C) 2000 John Wiley & Sons, Inc.