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Index Arbitrage and the Pricing Relationship between Australian Stock Index Futures and Their Underlying SharesJames Richard CummingsMacquarie University, Faculty of Business and Economics Alex FrinoUniversity 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 seriesDate posted: August 25, 2008 ; Last revised: November 24, 2011Suggested CitationContact Information
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