Please use this identifier to cite or link to this item: http://hdl.handle.net/1893/25020
Appears in Collections:Economics Journal Articles
Peer Review Status: Refereed
Title: Non-linear dynamics and competing behavioral interpretations: evidence from intra-day FTSE-100 index and futures data
Authors: McMillan, David
Speight, Alan E H
Contact Email: david.mcmillan@stir.ac.uk
Issue Date: Apr-2006
Citation: McMillan D & Speight AEH (2006) Non-linear dynamics and competing behavioral interpretations: evidence from intra-day FTSE-100 index and futures data, Journal of Futures Markets, 26 (4), pp. 343-368.
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.
DOI Link: http://dx.doi.org/10.1002/fut.20203
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