The price relationship between financial markets using the concordance correlation coefficient

Abstract

This research proposes the concordance correlation coefficient in financial research area as new methodology which can investigate the price relationship between two financial markets. The main purpose of this thesis is to examine whether the concordance correlation coefficient is really an appropriate methodology to investigate the price relationship between the stock index and its futures markets derived from the cost-of-carry model. First, this research investigates the abnormal price movements that have an expiration effect on the price relationship between the S&P 500 stock index and its futures markets using the concordance correlation coefficient. The price movement of the underlying asset and its derivatives markets around the expiration day of derivatives contracts needs to be considered based on the price relationship between two financial markets because there is a close relationship between the expiration day of derivatives and the degree of convergence between the underlying asset and its derivatives prices. Examining the minute-to-minute intraday price data from March 15, 2002 to March 17, 2005 for the S&P 500 stock index and its nearby futures contracts shows that the concordance correlation coefficient increases closer to the expiration day of futures contracts. This result implies that the price relationship between the S&P 500 stock index and its futures markets is associated with the expiration effect of futures contracts and that this effect can be captured by the concordance correlation coefficient. Second, this research investigates that the concordance correlation coefficient is an appropriate methodology to determine ex post arbitrage opportunities and to maximize ex ante arbitrage profit through the analysis of the price relationship derived from the cost-of-carry model. To increase the robustness of the result and to enable us to generalize our conclusions, this analysis is carried out in consideration of external uncertainty, incl...