𝔖 Bobbio Scriptorium
✦   LIBER   ✦

The limits to stock index arbitrage: Examining S&P 500 futures and SPDRS

✍ Scribed by Nivine Richie; Robert T. Daigler; Kimberly C. Gleason

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
155 KB
Volume
28
Category
Article
ISSN
0270-7314

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

This study examines factors affecting stock index spot versus futures pricing and arbitrage opportunities by using the S&P 500 cash index and the S&P 500 Standard and Poor's Depository Receipt (SPDR) Exchange‐Traded Fund (ETF) as “underlying cash assets.” Potential limits to arbitrage when using the cash index are the staleness of the underlying cash index, trading costs, liquidity (volume) issues of the underlying assets, the existence of sufficient time to execute profitable arbitrage transactions, short sale restrictions, and the extent to which volatility affects mispricing. Alternatively, using the SPDR ETF as the underlying asset mitigates staleness and trading cost problems as well as the effects of volatility associated with the staleness of the cash index. Minute‐by‐minute prices are compared over different volatility levels to determine how these factors affect the limits of S&P 500 futures arbitrage. Employing the SPDR as the cash asset examines whether a liquid tradable single asset with low trading costs can be used for pricing and arbitrage purposes. The analysis examines how long mispricing lasts, the impact of volatility on mispricing, and whether sufficient volume exists to implement arbitrage. The minute‐by‐minute liquidity of the futures market is examined using a new transaction volume futures database. The results show that mispricings exist regardless of the choice of the underlying cash asset, with more negative mispricings for the SPDR relative to the S&P 500 cash index. Furthermore, mispricings are more frequent in high‐ and mid‐volatility months than in low‐volatility months and are associated with higher volume during high‐volatility months. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1182–1205, 2008

📜 SIMILAR VOLUMES

Optimal No-Arbitrage Bounds on S&P 500 I
Optimal No-Arbitrage Bounds on S&P 500 Index Options and the Volatility Smile
✍ Patrick J. Dennis 📂 Article 📅 2001 🏛 John Wiley and Sons 🌐 English ⚖ 176 KB 👁 1 views

## Abstract This article shows that the volatility smile is not necessarily inconsistent with the Black–Scholes analysis. Specifically, when transaction costs are present, the absence of arbitrage opportunities does not dictate that there exists a unique price for an option. Rather, there exists a

Has the introduction of S&P 500 ETF opti
Has the introduction of S&P 500 ETF options led to improvements in price discovery of SPDRs?
✍ Wei-Peng Chen; Huimin Chung 📂 Article 📅 2011 🏛 John Wiley and Sons 🌐 English ⚖ 174 KB 👁 2 views

## Abstract This study sets out to investigate trading in Standard and Poor's Depository Receipt Trust Series I (SPDR) options and the impact on the price‐discovery process of SPDRs. The empirical results reveal a significant rise in liquidity within the SPDR market following the introduction of SP