42 Pages Posted: 25 Aug 2008 Last revised: 24 Nov 2011
Date Written: December 2008
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.
Keywords: Stock index futures, Arbitrage, Market efficiency
JEL Classification: G13, G14
Suggested Citation: 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: https://ssrn.com/abstract=1252643 or http://dx.doi.org/10.2139/ssrn.1252643