An Empirical Analysis of Lead-Lag Relationship of the Movements of Various Financial Markets

The efficient-market hypothesis (EMH) asserts that financial markets are "informationally efficient," i.e. all relevant information will be fully and immediately reflected in a security's market price. Other researchers however, have disputed the efficient-market hypothesis both empirically and theoretically. If efficient market hypothesis is held true, then we should expect to see a simultaneous co-movement among different security markets with information; while on the other hand, if different security markets digest and reflect information with different speeds, then we should expect to see some lead-lag movements among various security markets. In this paper, we study the question whether or not investment information will be reflected in different security markets simultaneously by empirically testing the lead-lag movement among various financial indices. We focus on three major financial markets: stock market, derivative markets and fixed-income markets and investigate the movement of major financial indices which are proxies of these security markets. Our overall findings suggest that all three major financial markets (equity, fixed income and derivative) are closely correlated with each other. However, we do see some level of lead-lag relationships among our variables and thus provide certain evidence that is against the efficient market hypothesis. Our results will also offer insights towards a better understanding about how quickly different security markets process and reflect information and at the same time benefit investors who wish to profits from arbitraging among different security markets by taking advantage of the different speeds that information is processed and reflected in different security market.