Index Arbitrage and the Pricing Relationship between Australian Stock Index Futures and Their Underlying Shares

23 Pages Posted: 3 Aug 2011

See all articles by James Richard Cummings

James Richard Cummings

affiliation not provided to SSRN

Alex Frino

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

Date Written: September 2011

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 transaction 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, G13, G14

Suggested Citation

Cummings, James Richard and Frino, Alex, Index Arbitrage and the Pricing Relationship between Australian Stock Index Futures and Their Underlying Shares (September 2011). Accounting & Finance, Vol. 51, Issue 3, pp. 661-683, 2011, Available at SSRN: https://ssrn.com/abstract=1904116 or http://dx.doi.org/10.1111/j.1467-629X.2010.00365.x

James Richard Cummings (Contact Author)

affiliation not provided to SSRN

Alex Frino

The 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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