his paper finds that the parity between the gold and silver spot prices T persists in the gold and silver futures markets. This relationship facilitates the development of a trading strategy profiting from temporary disparities. After adjusting for transaction costs and risks involved in futures trading, positive excess returns may be realized by arbitraging between the gold and silver futures markets.
I. INTRODUCTION
Sufficient academic interest has been focused on exploring different forms of market anomalies in various asset returns. However, traders usually find it difficult to actually profit from consistently reoccurring market inefficiencies. The most common reason seems to relate to transaction cost levels which eliminate profit opportunities. The failure by traders to capitalize on these opportunities has prompted recent interest in investigating similar profit potentials in their derivative asset markets. In general, investments in a derivative asset, e.g., futures and options, involve high leverage and low transaction costs. These two institutional arrangements become the bases of profit opportunities for arbitragers in futures markets if any inefficiency may be identified. If the same pricing inefficiency flows through to futures markets, minimal excess returns in cash markets may be greatly enhanced in futures markets.
On this issue, French (1983), Figlewski (1984) and show arbitrage opportunities during the early life of futures contracts. demonstrate the arbitrage linkages between new options and their underlying instruments. In particular, find that a short futures strategy in the T-Bond market would generate a mean return of $250 per trading day over the period of 1979-1982 present evidence of a profitable bear spread strategy using a T-BilVT-Bond futures combination.