A Threshold Error Correction Model for Intraday Futures and Index Returns

Posted: 5 Jul 1998

See all articles by Martin Martens

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Paul Kofman

The University of Melbourne

Ton Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management; Tinbergen Institute

Date Written: March 1995

Abstract

Index-futures arbitrageurs enter into the market only if the deviation from the arbitrage relation is large enough to compensate for transaction costs and associated interest-rate and dividend risks. Using a threshold autoregression model for the mispricing error, we estimate the band around the theoretical futures prices within which arbitrage is not profitable for most arbitrageurs. Combining these thresholds with an error correction model, we can make a distinction between the effects of arbitrageurs and infrequent trading on index and futures returns. The impact of the mispricing error on the returns is increasing with the magnitude of the mispricing error, and the effect of futures returns on index returns is significantly larger when the basis is negative.

JEL Classification: C22, G12

Suggested Citation

Martens, Martin P.E. and Kofman, Paul and Vorst, Ton A.C.F., A Threshold Error Correction Model for Intraday Futures and Index Returns (March 1995). Available at SSRN: https://ssrn.com/abstract=7082

Martin P.E. Martens (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

Paul Kofman

The University of Melbourne ( email )

Faculty of Economics and Commerce
Department of Finance
Parkville, Victoria 3010
Australia
61 3 8344 3794 (Phone)

Ton A.C.F. Vorst

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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