The time difference effect of a measurement unit in the leadヨlag relationship analysis of Korean financial market

This paper investigates Korean financial markets for the study of market microstructure of price discovery in the KOSPI 200 stock index and its related derivatives markets using different time-interval price data. The Granger causality test and vector error correction model are used to analyze the empirical relationship between markets. The lead–lag relationship between the KOSPI 200 stock index and its derivatives markets can be supported by the trading cost hypothesis and leverage effect hypothesis. This paper also shows the congruent lead–lag results in various time-intervals, but as the time-interval becomes large, more information loss and spurious results are induced. The correlations among 1-minute data, 5minute data, and 10-minute data are significant under a 1% significance level, however, in the case of 60minute data, the correlations with any other time-interval data are not significant. The 60-minute data even have negative correlations with others. These results are consistent regardless of the raw data or the innovation data. Therefore, we can conclude that the previous research using the 60-minute data due to an insufficiency of trading volume can be biased considerably. © 2006 Elsevier Inc. All rights reserved. JEL classification: G15