High-frequency lead-lag relationships in the Chinese stock index futures market: tick-by-tick dynamics of calendar spreads

TL;DR

This paper examines high-frequency lead-lag relationships in Chinese stock index futures, revealing a consistent near-month lead pattern, its predictive power for returns, and profitability of trading strategies based on these dynamics.

Contribution

It provides the first detailed tick-by-tick analysis of lead-lag relationships across different futures maturities in the Chinese market, highlighting liquidity-driven price discovery.

Findings

Near-month futures lead longer-dated contracts by one tick

Lead-lag spread has predictive power for returns

Trading on lead-lag signals is profitable after costs

Abstract

Lead-lag relationships, integral to market dynamics, offer valuable insights into the trading behavior of high-frequency traders (HFTs) and the flow of information at a granular level. This paper investigates the lead-lag relationships between stock index futures contracts of different maturities in the Chinese financial futures market (CFFEX). Using high-frequency (tick-by-tick) data, we analyze how price movements in near-month futures contracts influence those in longer-dated contracts, such as next-month, quarterly, and semi-annual contracts. Our findings reveal a consistent pattern of price discovery, with the near-month contract leading the others by one tick, driven primarily by liquidity. Additionally, we identify a negative feedback effect of the "lead-lag spread" on the leading asset, which can predict returns of leading asset. Backtesting results demonstrate the profitability of trading based on the lead-lag spread signal, even after accounting for transaction costs. Altogether, our analysis offers valuable insights to understand and capitalize on the evolving dynamics of futures markets.