The profitability of index futures arbitrage: Evidence from bid‐ask quotes

Kee‐Hong Bae, Kalok Chan and Yan‐Leung Cheung

Journal of Futures Markets, 1998, vol. 18, issue 7, 743-763

Abstract: Previous studies investigated the profitability of stock index futures based on transaction price data, and could overstate the frequency of arbitrage opportunities and size of arbitrage profits. This article obtains a data base for the Hong Kong index futures and index options market that contains both real‐time transaction prices and bid‐ask quotes; the article further examines the bias of identifying arbitrage opportunities based on transaction prices. The article finds the percentage of observations violating no‐arbitrage bounds is significantly reduced when bid‐ask quotes are employed instead of transaction prices. This suggests studies that implement arbitrage strategies based on transaction prices employ prices from the wrong side of the spread. This article finds a relationship between the frequency of violations (evaluated from transaction prices) and the size of bid‐ask spreads in the futures and options markets. This phenomenon indicates that a larger mispricing, which may arise when the bid‐ask spread is wider, does not necessarily imply profitable arbitrage opportunity. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:743–763, 1998

Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/

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:wly:jfutmk:v:18:y:1998:i:7:p:743-763

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0270-7314

Access Statistics for this article

Journal of Futures Markets is currently edited by Robert I. Webb

More articles in Journal of Futures Markets from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().