Further Evidence on Mean Reversion in Index Basis Changes

Posted: 16 Oct 2001

See all articles by Yan He

Yan He

Indiana University Southeast - School of Business

Chunchi Wu

SUNY at Buffalo - School of Management

Abstract

We provide further evidence on the stochastic behavior of the futures minus cash index basis. In addition to infrequent trading, we identify index aggregation as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelation in basis changes. Our empirical results show that index price and basis changes often contain a moving average component. After the effects of infrequent trading and index aggregation are purged, we find that the autocorrelation of the adjusted index basis changes is significantly reduced.

JEL Classification: G13, G15

Suggested Citation

He, Yan and Wu, Chunchi, Further Evidence on Mean Reversion in Index Basis Changes. Available at SSRN: https://ssrn.com/abstract=274418

Yan He

Indiana University Southeast - School of Business ( email )

4201 Grant Line Road
New Albany, IN 47150
United States
812-941-2308 (Phone)
812-941-2672 (Fax)

Chunchi Wu (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

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