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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

Alex Frino


University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

December 2008


Abstract:     
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

working papers series


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Date posted: August 25, 2008 ; Last revised: November 24, 2011

Suggested Citation

Cummings, James R and Frino, Alex, Index Arbitrage and the Pricing Relationship between Australian Stock Index Futures and Their Underlying Shares (December 2008). Available at SSRN: http://ssrn.com/abstract=1252643 or http://dx.doi.org/10.2139/ssrn.1252643

Contact Information

James R Cummings
Macquarie University, Faculty of Business and Economics ( email )
Australia
Alex Frino (Contact Author)
University of Sydney - Discipline of Finance ( email )
Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

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