A Partially Linear Approach to Modelling the Dynamics of Spot and Futures Prices

Gaul, Juergen; Theissen, Erik

doi:10.2139/ssrn.1101501

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A Partially Linear Approach to Modelling the Dynamics of Spot and Futures Prices

22 Pages Posted: 4 Mar 2008

See all articles by Juergen Gaul

Juergen Gaul

University of Bonn - The Bonn Graduate School of Economics

Erik Theissen

University of Mannheim - Finance Area

Date Written: March 3, 2008

Abstract

In this paper we consider the dynamics of spot and futures prices in the presence of arbitrage. We propose a partially linear error correction model where the adjustment coefficient is allowed to depend non-linearly on the lagged price difference. We estimate our model using data on the DAX index and the DAX futures contract. We find that the adjustment is indeed nonlinear. The linear alternative is rejected. The speed of price adjustment is increasing almost monotonically with the magnitude of the price difference.

Keywords: Futures Markets, Cointegrated systems, Partially linear models, Nonparametric methods

JEL Classification: C32, C14, G13, G14

Suggested Citation: Suggested Citation

Gaul, Juergen and Theissen, Erik, A Partially Linear Approach to Modelling the Dynamics of Spot and Futures Prices (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=1101501 or http://dx.doi.org/10.2139/ssrn.1101501