Mispricing in stock index futures: A re-examination using the spi

Tim Brailsford*, Allan Hodgson

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

19 Citations (Scopus)

Abstract

This paper re-examines and extends stock index futures pricing in Australia. The paper has two objectives. First, the paper provides a comprehensive examination of stock index futures pricing which is, as far as possible, free from method bias which has been problematic in previous studies. Second, the paper analyses the behaviour of the mispricing series in relation to a number of explanatory variables. The results indicate that a frequent but small mispricing series is prevalent and highly predictable. The series is related to time-to-expiry, which is consistent with the arbitrage position having an option component, and has a positive association with both volatility from the overnight US market and contemporaneous futures market volatility. Some institutional and time features are sample specific, whilst surprises in futures trading volume also have an impact on absolute mispricing. We conclude that the relationship between the markets is dynamic and likely to be driven by more complex nonlinear relationships.

Original languageEnglish
Pages (from-to)21-45
Number of pages25
JournalAustralian Journal of Management
Volume22
Issue number1
DOIs
Publication statusPublished - 1997
Externally publishedYes

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