COINTEGRATION AND INTERMARKET PRICE CHANGE RELATIONS IN THE EXCHANGE MARKET

Using transactions data on the British Pound, Deutsche Mark, and Japanese Yen in 1994, this study examines the lead/lag relations among the currency spot, option, futures, and futures option markets. This study is important due to the scope of market linkages examined and the number of currencies considered. Empirical results show that futures option trading leads futures trading and (spot) option trading, futures trading leads spot trading and (spot) option trading, and spot trading leads (spot) option trading. Thus new information seems to flow into futures option market first, followed by futures market, spot market, and (spot) option market. Arbitrage profits may be possible, but transaction costs and other market imperfections may inhibit any such profiteering.