← Methodology Lab

Futures move first: what index futures say before the stock market opens

A classic US study found that stock index futures tend to move about five minutes ahead of the index itself. In Brazil, index futures open an hour before stocks.

Research note · · 3 min read

The question

A stock index and its futures contract describe the same thing: the value of a basket of stocks. In theory they should move together. In practice, one of them often reacts to news first.

What the research found

Stoll and Whaley (1990) compared five-minute returns of the S&P 500 and the Major Market Index with those of their futures contracts. Futures returns tended to lead the index by about five minutes, and sometimes by ten minutes or more. The lead remained after the authors adjusted for the fact that some stocks in an index trade infrequently, which makes the index look slower than it really is.

The relationship was not entirely one-way: past index returns also carried a small amount of information about futures returns. But the main direction was futures first, stocks second.

A common explanation is cost and convenience. Taking a view on the whole market is cheaper and faster with one futures contract than with dozens of separate stock orders, so new information often shows up there first.

Food for thought for the Ibovespa open

In Brazil the head start is built into the schedule. On a normal day, B3’s mini Ibovespa futures (WIN) open at 9:00 Brasília time, an hour before the stock market opens at 10:00. Once futures are trading, the market itself is publishing a live estimate of where the index may open.

That is why an overnight estimate is most useful before 9:00. After that, the futures price is the better guide, and information gathered overnight has little to add.

Leads are short and can fade. In the study the lead was measured in minutes, not hours. News travels quickly to every related price, so any head start is small and easy to overstate.

References

Summaries are written in our own words. The studies cited do not evaluate or endorse Up or Down BR. Not investment advice.

All research notes