Abstract:
In this paper, it is shown how one can employ the wavelet analysis to reconstruct data based only
on the subset of information that differentiates the twofundamentally related time series: spot and futures
indices. Such an analysis allows researchers tofocus on examining the relationship between the two price
series. Furthermore, it also enables examination and comparison of reconstructed prices based on different
levels of information detail. It isfound that the lead-lag relationship described in the empirical literature still
exists between the spot and the futures index prices. Such a relationship is more persistent when more detailed
information is used for price reconstruction. This implies that, if market imperfection is to be blamed for the
noncontemporaneous relationship between the spot and thefutures indices, one should concentrate solely on
those imperfections that are likely to occur within very short time horizons.
