Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price

104 Pages Posted: 24 Sep 2020 Last revised: 22 Jul 2021

See all articles by Todd M. Hazelkorn

Todd M. Hazelkorn

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Kaushik Vasudevan

Yale University

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2021

Abstract

We argue that deviations from the law of one price between futures and spot prices, known as futures-cash bases, capture important information about liquidity demand for equity market exposure in global markets. We show that bases (1) co-move with dealer and investor futures positions, (2) are contemporaneously positively correlated with spot and futures returns with the same sign, and (3) negatively predict futures and spot market returns with the same sign. These findings are consistent with a model where the futures-cash basis reflects liquidity demand that is common to futures and cash equity markets. We show persistent supply-demand imbalances for equity index exposure reflected in bases, where compensation for meeting that liquidity demand is large (5-6% annual premium).

JEL Classification: G12, G13, G14, G15, G20

Suggested Citation

Hazelkorn, Todd and Moskowitz, Tobias J. and Vasudevan, Kaushik, Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price (July 21, 2021). Available at SSRN: https://ssrn.com/abstract=3658560 or http://dx.doi.org/10.2139/ssrn.3658560

Todd Hazelkorn

AQR Capital Management, LLC ( email )

Greenwich, CT
United States
203 742 3914 (Phone)

HOME PAGE: http://www.aqr.com

Tobias J. Moskowitz

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kaushik Vasudevan (Contact Author)

Yale University ( email )

165 Whitney Avenue
New Haven, CT 06511
United States

HOME PAGE: http://www.kvasudevan.com

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