Abstract

http://ssrn.com/abstract=1953878
 
 

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Arbitrage of Single Stocks Versus Futures in India


Ronald T. Slivka


NYU Poly - Department of Finance and Risk Engineering

Vikram Shah


New York University (NYU) - NYU Polytechnic School of Engineering

Jiawei Wu


New York University (NYU) - NYU Polytechnic School of Engineering

November 3, 2011


Abstract:     
Whether for hedging, investing or trading purposes, securities regulators and stock exchanges along with domestic and foreign institutional investors all have a common interest in having fairly priced futures contracts. Achieving and sustaining fairly valued equity futures depends heavily on the existence of active arbitrage in which stocks and futures are paired off against one another by professional arbitrageurs seeking to exploit any mispricing. Current constraints on efficient arbitrage in India include the high costs of brokerage, government, exchange and regulatory fees, an underdeveloped securities lending business to support short selling and, to a lesser extent, an electronic stock execution platform in need of speedier execution. The result of these costs and constraints is that stock versus futures arbitrage in India is presently confined almost entirely to intraday transactions between selected single stocks and their stock futures contracts.

Using recent single stock futures data this article explores specific arbitrage details of single stocks vs. their futures in the India market. The zero arbitrage band width for this type of arbitrage was found to be typically at least twice that occurring in mature global markets and in serious need of narrowing. If India regulators, exchanges and taxing authorities wish to encourage the growth of valuable arbitrage business, then steps will be needed to reduce the costs that widen this band. Knowledge of the requirements for successful arbitrage detailed in this paper can suggest to regulators and exchanges steps necessary for improving market liquidity and increasing participation in India's rapidly growing stock and futures markets.

Number of Pages in PDF File: 12

Keywords: India futures, single stock futures, arbitrage, zero arbitrage band, futures fair value, price discovery, NIFTY index futures

JEL Classification: G10, G13, G15

working papers series





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Date posted: November 3, 2011 ; Last revised: February 8, 2012

Suggested Citation

Slivka, Ronald T. and Shah, Vikram and Wu, Jiawei, Arbitrage of Single Stocks Versus Futures in India (November 3, 2011). Available at SSRN: http://ssrn.com/abstract=1953878 or http://dx.doi.org/10.2139/ssrn.1953878

Contact Information

Ronald T. Slivka (Contact Author)
NYU Poly - Department of Finance and Risk Engineering ( email )
Brooklyn, NY 11201
United States
2153213524 (Phone)
Vikram Shah
New York University (NYU) - NYU Polytechnic School of Engineering ( email )
Brooklyn, NY 11201
United States
Jiawei Wu
New York University (NYU) - NYU Polytechnic School of Engineering ( email )
Brooklyn, NY 11201
United States
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