An empirical analysis of arbitrage opportunities in the treasury bill futures market

✍ Scribed by Shantaram P. Hegde; Ben Branch

• Publisher: John Wiley and Sons
• Year: 1985
• Tongue: English
• Weight: 967 KB
• Volume: 5
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990050310

✦ Synopsis

Shantaram P. Hegde Ben Branch imultaneous spot and futures trading in T-bills permits investors to construct S a combination of spot and futures positions that is a close substitute for a corresponding pure spot bill position. If the net returns on the spot-futures combination exceed the comparable spot bill returns, arbitrage between spot and futures markets becomes profitable. Obviously, profitable arbitrage cannot prevail if the markets are efficient. Recent studies by Capozza and Cornell (1979), , and Vignola and Dale (1980), report that the difference between the futures price and the corresponding spot price is large enough to render quasiarbitrage profitable, but conclude that profitable pure arbitrage opportunities rarely exist.'

This article reexamines the potential for arbitrage between the 90-day T-bill futures contract of the International Money Market and the spot T-bill market. We assume that an arbitrageur compares the futures price on the nearby contract with the corresponding implied forward price and employs the following trading rule: (i)

if the futures price for a contract with a delivery date m weeks hence is less than the corresponding implied forward price, buy and hold both the rn-week bill and

The authors acknowledge with thanks the participants in the Universities of Notre Dame-Illinois-Indiana finance workshop and the two anonymous reviewers of this Journal.

'Pure arbitrage involves short-selling in the spot market, whereas quasi-arbitrage does not. For a review of other studies on the efficiency of T-bill futures market see .