High liquidity and low transaction cost make the price discovery function of stock index futures. Based on the price discovery function of stock index futures, the price fluctuation of stock index futures will have an impact on the spot price fluctuation. And this effect can also be used as risk-free arbitrage.
The lead-lag relationship between futures and spot, and futures' prediction of future spot trend are the basis of risk-free arbitrage. The lead-lag/price discovery relationship is based on the minute data of the day. In the mature capital market, the futures price is ahead of the spot price, and there is a causal relationship.
This causal relationship makes intraday arbitrage possible. If the daily closing price is taken as the experimental data, it cannot be concluded that the futures price changes with the spot price, because the futures closing price is 15 minutes later than the spot price. Therefore, the price discovery function of stock index futures only exists in the day.
In the past, it was enough to study the relationship between lead-lag/price discovery. For example, Kawaller and Koch( 1987+0987) pointed out in their research that the futures of Standard & Poor's 500 are 0- 15 minutes ahead of the spot.
Swinnerton, Curcio, Bennett (1988) verified that the futures price was 5 minutes ahead of the spot price, and concluded that the futures price was ahead of the spot for the following three reasons.
1, investors will choose to trade stock index futures first because the transaction cost is small.
2. The futures market is more liquid, and the degree and probability of slippage are smaller in the case of violent fluctuations.
3. The trading of the lower stocks contained in the spot index is inactive, which drags down the reaction of the spot index to the news.