Index Arbitrage and the Pricing Relationship between Australian Stock Index Futures and Their Underlying Shares
James R Cummings
Macquarie University, Faculty of Business and Economics; Centre for International Finance and Regulation (CIFR)
University of Sydney - Discipline of Finance; Financial Research Network (FIRN)
This paper examines the mispricing of Australian stock index futures. Exogenous and endogenous price volatility is confirmed to have a positive impact on the mispricing spread, after filtering out predictable time series components. More accurate pricing associated with surprise trading volume in the underlying stocks is consistent with arbitrageurs acting to narrow price disparities relative to the futures market. Ex-ante interest rate volatility is the primary source of risk faced by arbitrageurs and fluctuations in the market impact cost of opening index arbitrage positions influence the extent to which they drive prices towards theoretical fair values.
Number of Pages in PDF File: 42
Keywords: Stock index futures, Arbitrage, Market efficiency
JEL Classification: G13, G14
Date posted: August 25, 2008 ; Last revised: November 24, 2011
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