A threshold error-correction model for intraday futures and index returns

✍ Scribed by Martin Martens; Paul Kofman; Ton C. F. Vorst

• Publisher: John Wiley and Sons
• Year: 1998
• Tongue: English
• Weight: 213 KB
• Volume: 13
• Category: Article
• ISSN: 0883-7252
• DOI: 10.1002/(sici)1099-1255(199805/06)13:3<245::aid-jae480>3.0.co;2-e

✦ Synopsis

Index-futures arbitragers only enter into the market if the deviation from the arbitrage relation is suciently large to compensate for transaction costs and associated interest rate and dividend risks. We estimate the band around the theoretical futures price within which arbitrage is not pro®table for most arbitragers, using a threshold autoregression model. Combining these thresholds with an error-correction model, we show that the impact of the mispricing error is increasing with the magnitude of that error and that the information eect of lagged futures returns on index returns is signi®cantly larger when the mispricing error is negative.