Cash-futures basis and the impact of market maturity, informed trading, and expiration effects
Charles Chang and
International Review of Economics & Finance, 2015, vol. 35, issue C, 197-213
Cash-futures basis, a proxy for arbitrage opportunities, is examined, and the impact of informed trading and the changing roles of speculators and arbitrageurs are analyzed in both the non-expiration and near-expiration periods. While we observe that market frictions account to some extent for negative spreads, we also found that volatility and liquidity widen spread magnitude, suggesting that speculation dominates arbitrage in this market. Puzzlingly, we found that informed trading impacts spreads in the opposite manner, depending on whether the contract is near expiration, highlighting the importance of controlling for expiration in basis-spread tests. Finally, we construct a measure to proxy for market maturity and track these interactions throughout the course of the market's maturation.
Keywords: Arbitrage; Speculators; Basis risk; Liquidity; Informed trading; Market maturity (search for similar items in EconPapers)
JEL-codes: D53 G13 G14 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:35:y:2015:i:c:p:197-213
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