Wen-Hsiu Kuo Department of Business Administration National Cheng Kung University and
Department of Finance Ling Tung University 1, Lingtung Road, Nantun 408 Taichung City, Taiwan
Shih-Ju Chan Department of Business Administration Kao Yuan University 1821,Chung-Shan Rd., Lu-Chu Hsiang Kaohsiung County 821,Taiwan
3. Methodology
3.1. Cointegration test and vector error correction model
First, we test the market efficiency hypothesis (MEH) in Taiwan index futures market by examining whether the cointegrated relationship (i.e., long-run equilibrium relationship) among futures, spot prices and several macroeconomic factors exists before and after the opening up of futures market to QFII. Given that the five variables are integrated of order one, the cointegration test proposed by Johansen and Juselius (1990) is performed. If there are cointegrated relationships among futures, spot prices and several macroeconomic factors, then we suggest that some market inefficiency exists in Taiwan index futures market.
Second, for cointegrated series, Granger causality tests need to be performed in the corresponding VECM framework according to the Granger Representation Theorem proposed by Engle and Granger (1987). This study employs the VECM to examine whether the lead-lag relationship between the futures and spot markets differs for the pre- and post-QFII periods. To control effects of macroeconomic factors on the relationship between the futures and spot markets, we incorporate the macroeconomic
