Mispricing and trader positions in the S&P 500 index futures market
Chiou-Fa Lin and
The North American Journal of Economics and Finance, 2017, vol. 42, issue C, 250-265
This study examines the effect of traders’ net positions on mispricing in the S&P 500 index futures market. We find that while positive mispricing is associated with hedgers’ net short and speculators’ net long positions, negative mispricing is related to hedgers’ net long and speculators’ net short positions. This relationship is stable for speculators across the pre- and post-2004 periods; however, it is dominant for hedgers particularly during the pre-2004 period. Contrary to the popular belief, our analysis finds no evidence that speculators are responsible for irrational movements in futures prices by enlarging the size of mispricing. Furthermore, a high magnitude of hedgers’ net positions signals the convergence of mispricing. We also found that according to a recent new disaggregation for trader positions, asset managers tend to delay the convergence of mispricing and hedge funds help shrink the size of mispricing. However, these relationships are not stronger than those implies by the hedger/speculator classification. These findings support the view that speculators’ positions are informative about the direction of index futures mispricing, while hedgers’ positions determine the convergence of mispricing.
Keywords: Futures mispricing; Hedgers; Speculators; Net positions; Mean reversion (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 D82 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:42:y:2017:i:c:p:250-265
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