A Limited Stock Arbitrage of the Sydney Futures Exchange SPI Contract

Ben Hunt ()
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Ben Hunt: Finance Discipline Group, University of Technology, Sydney, http://www.uts.edu.au/about/uts-business-school/finance

No 34, Working Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper examines the character of profitable arbitrage opportunities existing between the Australian share market and the Sydney Futures Exchange's share price index (SPI) contract. It first looks at the nature of the deviation of SPI futures prices from their theoretical values over the period 1988 to 1993. An adjustment cost model is offered as an explanation of these frequent deviations. The study details the construction of a feasible trading straegy designed to profit from SPI futures mispricing. To this end minimum variance portfolios are constructed from a limited number (ten) of Australian shares. A number of arbitrage strategies show a positive return after accounting for transaction costs. However the existence of profitable opportunities decreased markedly in the later years of the study. It is concluded that any inefficiencies, if they existed at all, were absent from 1992 onwards.

Pages: 14 pages
Date: 1993-10-01
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