Wavelet Analysis of the Cost-of-Carry Model

Wavelet Analysis of the Cost-of-Carry Model

Shinn-Juh Lin
Department of Quantitative Finance
National Tsing Hua University
shjlin@mx.nthu.edu.tw

Maxwell Stevenson
School of Finance and Economics
University of Technology, Sydney
Maxwell.Stevenson@uts.edu.au

Pages 87-102

Abstract

In this paper, it is shown how one can employ the wavelet analysis to reconstruct data based only on the subset of information that differentiates the two fundamentally related time series: spot and futures indices. Such an analysis allows researchers to focus on examining the relationship between the two price series. Furthermore, it also enables examination and comparison of reconstructed prices based on different levels of information detail. It is found that the lead-lag relationship described in the empirical literature still exists between the spot and the futures index prices. Such a relationship is more persistent when more detailed information is used for price reconstruction. This implies that, if market imperfection is to be blamed for the noncontemporaneous relationship between the spot and the futures indices, one should concentrate solely on those imperfections that are likely to occur within very short time horizons.

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