Abstract
Standard & Poor's Depositary Receipts (SPDRs) are exchange traded securities representing a
portfolio of S&P 500 stocks. They allow investors to track the spot portfolio and better engage in index
arbitrage. We tested the impact of the introduction of SPDRs on the efficiency of the S&P 500 index market.
Ex‐post pricing efficiency and ex‐ante arbitrage profit between SPDRs and futures were also
examined. We found an improved efficiency in the S&P 500 index market after the start of SPDRs trading.
Specifically, the frequency and length of lower boundary violations have declined since SPDRs began trading. This
result is consistent with the hypothesis that SPDRs facilitate short arbitrage by simplifying the process of
shorting the cash index against futures. Tests of pricing efficiency comparing SPDRs and futures suggested that
index arbitrage using SPDRs as a substitute for program trading in general results in losses. Although short
arbitrages earn a small profit on average, gains are statistically insignificant. A trade‐by‐trade
investigation showed that prices are instantaneously corrected after the presence of mispricing signals,
introducing substantial risk in arbitraging. Evidence in general supported pricing efficiency between SPDRs and
the S&P 500 index futures—both ex‐post and ex‐ante. © 2002 Wiley Periodicals, Inc.
Jrl Fut Mark 22:877–900, 2002