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Stock Index Futures Prices and the Asian Financial Crisis

Author

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  • TAUFIQ HASSAN
  • SHAMSHER MOHAMAD
  • MOHAMAD ARIFF
  • ANNUAR MD NASSIR

Abstract

This study reports new findings on the behavior of index futures (FKLI: code name of Kuala Lumpur Index Futures contract) prices and also records the effect of a major financial crisis on the prices. Since the inception of trading in 1995, the FKLI has been selling at a discount, which gradually increased till early 1997; further, at the onset of the financial crisis in July 1997, FKLI prices were at a high premium relative to its theoretical values. This significant mispricing of the contract declined after the initial overreaction to the crisis. Herding behavior during crisis, liquidity constraint and imposition of trading restrictions are some plausible explanations for the mispricing. This study also investigates whether trades by foreign investors had any impact when compared with prices by domestic investors. We find that foreign investors had a negative influence on permanent price changes while the domestic investors had a positive effect.

Suggested Citation

  • Taufiq Hassan & Shamsher Mohamad & Mohamad Ariff & Annuar Md Nassir, 2007. "Stock Index Futures Prices and the Asian Financial Crisis," International Review of Finance, International Review of Finance Ltd., vol. 7(3‐4), pages 119-141, September.
    • Handle: RePEc:bla:irvfin:v:7:y:2007:i:3-4:p:119-141
    DOI: 10.1111/j.1468-2443.2007.00071.x
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    References listed on IDEAS

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    Cited by:

    1. James R. Brown & Lauren C. Lax & Bruce C. Petersen, 2010. "Financial Market Crises and Natural Resource Production," International Review of Finance, International Review of Finance Ltd., vol. 10(1), pages 93-124, March.
    2. Hou, Yang (Greg) & Li, Steven, 2020. "Volatility and skewness spillover between stock index and stock index futures markets during a crash period: New evidence from China," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 166-188.
    3. James R. Brown & Lauren C. Lax & Bruce C. Petersen, 2010. "Financial Market Crises and Natural Resource Production," International Review of Finance, International Review of Finance Ltd., vol. 10(1), pages 93-124, March.

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