Further Evidence on Mean Reversion in Index Basis Changes

Yan He and Chunchi Wu

The Financial Review, 2001, vol. 36, issue 1, 95-124

Abstract: We provide further evidence on the stochastic behavior of the futures minus cash index basis. In addition to infrequent trading, we identify index aggregation as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelation in basis changes. Our empirical results show that index price and basis changes often contain a moving average component. After the effects of infrequent trading and index aggregation are purged, we find that the autocorrelation of the adjusted index basis changes is significantly reduced. Copyright 2001 by MIT Press.

Date: 2001
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