Title

Index arbitrage and the pricing relationship between Australian stock index futures and their underlying shares

RIS ID

117927

Publication Details

Cummings, J. Richard. & Frino, A. (2011). Index arbitrage and the pricing relationship between Australian stock index futures and their underlying shares. Accounting and Finance, 51 661-683.

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.

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Link to publisher version (DOI)

http://dx.doi.org/10.1111/j.1467-629X.2010.00365.x