An integer programming based strategy for Asian-style futures arbitrage over the settlement period

Raymond H. Chan (), Kelvin K. Kan and Alfred K. Ma
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Raymond H. Chan: Department of Mathematics, The Chinese University of Hong Kong, Postal: Hong Kong, China
Kelvin K. Kan: Department of Mathematics, The Chinese University of Hong Kong, Postal: Hong Kong, China
Alfred K. Ma: CASH Algo Finance Group, Postal: Hong Kong, China

Algorithmic Finance, 2018, vol. 7, issue 1-2, 31-42

Abstract: An Asian-style futures is settled by an Asian-style settlement procedure, more specifically, it is settled against the arithmetic average of the underlying asset prices taken over the settlement period. In this paper, we propose a practical trading strategy based on an integer programming technique to exploit the mispricing opportunity of Asian-style index futures over the settlement period using a proxy of the underlying asset. The integer program can detect mispricing, construct an arbitrage portfolio by using the proxy and dynamically maintain the arbitrage portfolio. Hang Seng Index Futures (HSI Futures) of the Hong Kong market is used to test the trading strategy. The historical data of HSI Futures shows that there is a positive relationship between the magnitude of mispricing and the time to maturity over the settlement period. Moreover, our empirical findings show positive profitability of the trading strategy.

Keywords: Arbitrage; Asian-style futures; Asian-style settlement procedure; expiration day; integer programming (search for similar items in EconPapers)
JEL-codes: C00 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:ris:iosalg:0065

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