A Study of the Relation between Market Imperfect and Index Arbitrage

• Main Authors: Yu-Lang Weng, 翁于琅
• Other Authors: Jan-Chung Wang
• Format: Others
• Language: zh-TW
• Published: 2003
• Online Access: http://ndltd.ncl.edu.tw/handle/36698103649932168407

碩士 === 國立高雄第一科技大學 === 金融營運所 === 91 === In perfect markets, if the carrying cost is in a state of disequilibrium (that is, an actual futures price deviates from its theoretical value predicted by the cost of carry model), then index arbitrage can obtain a riskless profit by simply engaging arbitrage activities in the spot market and the futures market. However, in the real world, capital markets are not perfect or frictionless. In fact, there exist imperfections in the real markets. Moreover, market imperfections make arbitrage mechanism to be unable to work under certain circumstances. Several researchers (e.g., Bailey (1989), Gay and Jung (1999), Brailsford and Cusack (1997), and Hsu and Wang (1999)) have found that market imperfections do affect pricing and arbitrage of stock index futures. This thesis employs ex-post test, ex-ante test, and regression analysis to examine whether the arbitrage profit is greater in the bear-market period with higher degree of imperfection than in the bull-market period. Moreover, tests are conducted over three district regulatory regimes relating to the short selling of stocks in Taiwan. This permits a study of how changes in short sales restrictions affect index arbitrage. The empirical evidence is based on two stock index futures contracts, i.e., SIMEX MSCI Taiwan stock index futures contract and TAIFEX Taiwan stock index futures contract. 5-minute intraday transactions data is used. The empirical results can be summarized as follows: (1) For both the SGX-DT futures and the TAIFEX futures, long-hedge arbitrage (that is, short stock, long futures) is more difficult in the bear-market period with higher degree of imperfection. This increases the magnitude and frequency of futures underpricing. Hence the ex-ante arbitrage profitability should be larger in the bear-market period. (2) For the SGX-DT futures, short sales restrictions increase the difficulty associated with long-hedge arbitrage. This increases the magnitude and frequency of futures underpricing. However, for the TAIFEX futures, the evidence does not support the above viewpoint.