This thesis examines the flow of information between the prominent Australian stock index futures contract, the SPI200, and its underlying stock index, the S&P/ASX200. A modified EGARCH framework is used to model the relationship between the two markets, focussing specifically on price discovery and volatility spillovers. The long-run cointegrating relationship between the markets is incorporated into the model to permit analysis of its effect on the conditional mean and variance of both markets. Additionally, the impact of the September-II terrorist attacks in America on the temporal relation between the two markets is investigated.
The results indicate that the futures market significantly impacts the mean and volatility of stock market returns, with a bi-directional information flow evident in the case of mean returns. The long-run equilibrium relationship is found to exert a significant influence, highlighting the importance of incorporating this information in modelling the information flow between the stock and futures markets. Analysis of the September-II event reveals that it did not have a substantial long-lasting impact on the usual relationship between the two markets.