Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Jieye Qin, Christopher Green and Kavita Sirichand

Journal of Futures Markets, 2019, vol. 39, issue 10, 1269-1300

Abstract: This paper develops a comprehensive modified cost‐of‐carry model to study the mispricing of Nikkei 225 index futures contracts traded in Osaka, Singapore, and Chicago based on a new 19‐year data set. Using this improved model, we find that dividend clustering, currency risk, and transaction costs all play an essential role in the estimation of Nikkei mispricing. An exponential smooth transition autoregressive‐GARCH model is used to describe the international dynamics of Nikkei mispricing. The results indicate that generally mean reversion in mispricing and limits to arbitrage are driven more by transaction costs than by heterogeneous investors.

Date: 2019
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