| Abstract: | The authors provide fresh evidence on the nonfundamental-driven price dynamics and interaction between index and index futures by examining the price movements of the S&P500 index and index futures surrounding the crossing of the 00 psychological barriers and 52-week highs and lows. In contrast to the extant evidence that futures leads in fundamental-driven price movements, the authors show the dominance of the crossing in the index in continuing the price trend after the crossing. Even when synchronized crossings occur, the index rises more than the index futures during upward crossings, whereas the index futures falls more than the index during downward crossings. While volatility is significantly reduced before upward crossings, but not for downward crossings, it is significantly higher during the crossing, and significantly lower after the crossings in both markets. These findings have clear practical implications for index arbitrageurs, investors, and regulators. |
