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Mispricing of index futures contracts and short sales constraints

โœ Scribed by Fung, Joseph K. W.; Draper, Paul

Publisher
John Wiley and Sons
Year
1999
Tongue
English
Weight
227 KB
Volume
19
Category
Article
ISSN
0270-7314

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โœฆ Synopsis

This article examines if changes in short sales constraints affect the extent to which index futures contracts are mispriced. In particular, the study analyzes the mispricing of the Hong Kong Hang Seng Index futures contracts. Tests are conducted over three distinct regulatory regimes relating to the short selling of stocks in Hong Kong. This permits a study of how changes in short selling regulations affect the mispricing of futures contracts. The study indicates that relaxing the constraints on short selling reduces the extent of futures mispricing. Multiple regression analysis is used to test the relationship between the magnitude of mispricing and various economic factors including cash market volatility, time-to-maturity of the contract, trading cost, and dividend payout rates. The study also finds that lifting of the short selling restrictions speeds up market adjustment, especially when a

We would like to acknowledge with thanks help received from Hang Seng Index Services Ltd and the Hong Kong Futures Exchange in providing the data, and the excellent research assistance provided by K.

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