Wavelet Analysis of the Cost-of-Carry Model
Department of Quantitative Finance
National Tsing Hua University
School of Finance and Economics
University of Technology, Sydney
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 two fundamentally related time
series: spot and futures indices. Such an analysis allows
researchers to focus 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 is found 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
the futures indices, one should concentrate solely on those
imperfections that are likely to occur within very short time
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