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Limits to arbitrage: The case of single stock futures and spot prices

Nidhi Aggarwal ()

Indira Gandhi Institute of Development Research, Mumbai Working Papers from Indira Gandhi Institute of Development Research, Mumbai, India

Abstract: Market frictions limit arbitrage, but these frictions affect different stocks differently. Using intraday data on a liquid single stock futures and spot market, we examine the arbitrage efficiency of these two markets. We find evidence of significant cross- sectional variation in the size and asymmetricity of no-arbitrage bands. To the extent that market frictions affect all stocks similarly, commonality in the size of the bands is expected. 17 of variation in the size of the bands is explained by the first principal component. Changes in funding liquidity is a key factor that determines variation in the common component.

Keywords: Limits to arbitrage; mispricing; no-arbitrage bands; short-selling constraints; transactions costs; funding constraints (search for similar items in EconPapers)
JEL-codes: G13 G14 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2015-05
New Economics Papers: this item is included in nep-ifn and nep-mst
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