Relationship of causality between spot and futures markets of Borsa Istanbul index 30 and Dow Jones industrial average

Abstract

Futures markets are mainly used as a tool for price discovery and for risk management on the spot markets and enable diversification for international portfolio investments. With this study we aim (1) to investigate the causality relationship between futures markets and spot market and (2) to examine the causality relationship between futures markets and spot markets in different countries. We are interested in both the futures markets - spot market relations and the interactions between the markets at international level. For variables we used the the BIST30 spot index and BIST30 futures contract representing the Borsa Istanbul market and the Dow-Jones 30 index and Dow-Jones 30 futures contract, which are the most important indices representing the US markets. Daily closing price data for the period between 2nd January, 2009 and 18th June, 2018 were analyzed using correlation, unit root test, causality test and regression equations. The results of the study show that the futures markets continue their price discovery role for both the spot markets and futures markets and are influential on other futures and spot markets at international level. These findings are important for investors wanting to invest in Turkey and in similarly considered emerging market economies. It will help investors take informed decisions by providing them with a more efficient price estimations utilizing the futures markets.