Intraday and Interday Basis Dynamics: Evidence from the FTSE 100 Index Futures Market

Abstract

We examine the intraday and interday dynamics of both the level of and changes in the FTSE (Financial Times-Stock Exchange) 100 index futures mispricing. Like numerous previous studies we find significant evidence of mean reversion and hence predictability in mispricing changes measured over high (minute-by-minute) and low (daily) frequencies.Contrary to other studies we show explicitly that for high-frequency data, this predictability is due not to microstructure effects but to arbitrage activity. Using a threshold autoregressive model that is consistent with arbitrage behavior, we show that such models imply first-order autocorrelation in mispricing changes similar in magnitude to that actually observed. For low-frequency data, we show that predictability is driven neither by arbitrage activity nor by microstructure effects. Rather, it is a statistical illusion that is the result of overdifferencing a trend-stationary series.

Nonlinear dynamics and competing behavioral interpretations: Evidence from intra‐day FTSE‐100 index and futures data

“…Yadav et al use hourly data, while Brooks and Garrett use daily data. Taylor, van Dijk, Franses, and Lucas (2000) and Garrett and Taylor (2001) use one-minute data and smooth-transition models to examine the effects of market structure changes and arbitrage trading on the basis. One-minute returns, which are examined here, are also considered in the work on U.S. index and index-futures (Dwyer et al, 1996;Martens et al, 1998). by fundamental traders may be limited by the potential for subsequent and more extreme mispricing, or "mis-price deepening" (Shleifer, 2000).…”

“…14 Further to this, we follow the procedure in Garrett and Taylor (2001) and consider whether the estimated models generate the levels of unconditional first-order autocorrelation that is observed in the basis changes. That is, using the estimated models the unconditional distribution of the first-order autocorrelation via Monte Carlo simulation is obtained.…”

The effect of the introduction of Cubes on the Nasdaq‐100 index spot‐futures pricing relationship

“…Alternatively, research by Chung (1991), Klemkosky and Lee (1991), and Miller, Muthuswamy, and Whaley (1994) suggests that most apparent arbitrage opportunities are a function of underestimated transaction costs, nonsynchronous trading estimations, or market immaturity. More recently, Garrett and Taylor (2000) and Tse (2000) show that mean reversion in futures mispricing is driven by arbitrage activity rather than by microstructure effects.…”

Using Four‐Moment Tail Risk to Examine Financial and Commodity Instrument Diversification

“…Most previous diversification studies on futures ignore the low correlations between different futures contracts, instead focusing on adding a single commodity index to a traditional portfolio of stocks and bonds (Jensen, Johnson, and Mercer, 2000; Garrett and Taylor, 2001). Using a commodity index creates issues with the composition of the index, such as the heavy weight in energy markets (73%) for the Goldman Sachs Commodity Index (GSCI).…”