Mean Reversion of Standard & Poor's 500 Index Basis Changes: Arbitrage-Induced or Statistical Illusion?

Merton Miller, Jayaram Muthuswamy and Robert E Whaley

Journal of Finance, 1994, vol. 49, issue 2, 479-513

Abstract: Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. The authors propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. The authors' analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced. Copyright 1994 by American Finance Association.

Date: 1994
References: Add references at CitEc
Citations: View citations in EconPapers (109)

Downloads: (external link)
http://links.jstor.org/sici?sici=0022-1082%2819940 ... O%3B2-R&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:49:y:1994:i:2:p:479-513

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().