A DYNAMIC KALMAN FILTERING APPROACH TO DETECT THE RELATIONSHIP BETWEEN FUTURES AND SPOT EQUITY MARKETS

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ERTUĞRUL H. M., Ozun A.

ACTA PHYSICA POLONICA B, no.9, pp.1929-1943, 2013 (SCI-Expanded) identifier

  • Publication Type: Article / Article
  • Publication Date: 2013
  • Doi Number: 10.5506/aphyspolb.44.1929
  • Journal Name: ACTA PHYSICA POLONICA B
  • Journal Indexes: Science Citation Index Expanded (SCI-EXPANDED), Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.1929-1943
  • Anadolu University Affiliated: No

Abstract

In this empirical paper, we design a dynamic Kalman filtering approach to investigate time-varying relationship between spot and futures equity markets. In addition to static bounds test from statistics, we revisit the econophysics discipline, and set up a dynamic Kalman filtering process that provides an iterative process for parameter estimation. The methodology is practically tested with a growing futures market in Turkey in the crisis period. Results of empirical evidence show that the prices of futures contracts can be predicted by spot prices indicating that the markets have not got information efficiency yet. The methodology based on econophysics discipline in the paper can be applied in other financial markets and macroeconomic indicators to detect time varying dynamic relationship between economic and financial variables.