The dual listing of stock index futures: Arbitrage, spread arbitrage, and currency risk

Board, John; Sutcliffe, Charles

doi:10.1002/(sici)1096-9934(199602)16:1<29::aid-fut2>3.0.co;2-j

Cited by 19 publications

(20 citation statements)

References 28 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…These are (a) the dividend clustering specific to Japanese companies; (b) the currency risk of the Chicago Nikkei futures, given that the Chicago futures contract is a quanto, that is, it is denominated, traded, and settled in a currency (US dollars) that is different from the underlying stock index (yen); (c) the different trading hours of the Nikkei markets, particularly in the context of Chicago's Globex trading system; and (d) the transaction costs of brokers and institutional investors. Hence the present model significantly improves on earlier models such as that of Board and Sutcliffe (1996) used to price Nikkei futures. Third, the exponential smooth transition autoregressive (ESTAR)-GARCH model is used to examine the effects of transaction costs and heterogeneous investors on the nonlinear adjustments of Nikkei mispricing.…”

mentioning

confidence: 66%

“…When futures contracts mature at time T, gains or losses on CME Nikkei futures depend on the difference between G t and G T = mF T = mS T , whereas H T is the yen equivalent of mS T . Following Board and Sutcliffe (1996), suppose that at time t, a CME investor shorts a Nikkei futures contract, with a value of G t ; borrows money at the dollar-denominated risk-free rate (r t ); and uses it to long a unit of the TSE Nikkei index, at the cost of H t . Dividends (K p ) received at time p on the index are converted to dollars and invested at the risk-free rate (r p ).…”

Section: Nearly Arbitrage-free Pricingmentioning

confidence: 99%

“…The risk-neutral no-arbitrage price for a dollar quanto on the Nikkei can then be shown to be (Baxter & Rennie, 1996): 8 Exchange rate futures cannot eliminate the risk as the cost of the index futures at expiration (S T ) is unknown at time t (Board & Sutcliffe, 1996). 9 We thank an anonymous referee for suggesting this model.…”

Section: Arbitrage-free Pricingmentioning

confidence: 99%

“…The width of the no-arbitrage band set by transactions costs is determined by investors with the lowest costs (Gay & Jung, 1999;MacKinlay & Ramaswamy, 1988). 5 These estimates are based on: Brenner et al (1989aBrenner et al ( , 1989bBrenner et al ( , 1990 who estimate transaction costs in the OSE and SGX to be 0.5%, 1.0%, and 2.0%; and Board and Sutcliffe (1996) who estimate the transaction costs of spread arbitrage in the CME to be 1.0%. 6 A long arbitrage requires buying stock and selling futures at time t; then selling the stock and repurchasing the futures at expiration.…”

mentioning

confidence: 99%

See 3 more Smart Citations

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Qin

Green

Sirichand

2019

Journal of Futures Markets

View full text Add to dashboard Cite

This paper develops a comprehensive modified cost‐of‐carry model to study the mispricing of Nikkei 225 index futures contracts traded in Osaka, Singapore, and Chicago based on a new 19‐year data set. Using this improved model, we find that dividend clustering, currency risk, and transaction costs all play an essential role in the estimation of Nikkei mispricing. An exponential smooth transition autoregressive‐GARCH model is used to describe the international dynamics of Nikkei mispricing. The results indicate that generally mean reversion in mispricing and limits to arbitrage are driven more by transaction costs than by heterogeneous investors.

show abstract

mentioning

confidence: 66%

Section: Nearly Arbitrage-free Pricingmentioning

confidence: 99%

Section: Arbitrage-free Pricingmentioning

confidence: 99%

mentioning

confidence: 99%

See 2 more Smart Citations

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Qin

Green

Sirichand

2019

Journal of Futures Markets

View full text Add to dashboard Cite

show abstract

“…It is therefore surprising that although there has been interest in cash-futures arbitrage, [14][15][16][17] interand intra-commodity spread trading has been largely ignored among the academic fraternity. 1,[18][19][20][21][22] Studies such as those by Sweeney, 23 Pruitt and White, 24 and Dunis 25 directly support the use of technical trading rules as a means of trading financial markets. Trading rules such as moving averages, filters and patterns seem to generate returns above the conventional buy and hold strategy.…”

Section: Introductionmentioning

confidence: 99%

Trading and filtering futures spread portfolios: Further applications of threshold and correlation filters

Dunis¹,

Laws²,

Evans³

2010

J Deriv Hedge Funds

View full text Add to dashboard Cite

This study researches the topic of trading futures spreads, that is, trading the pricing differential between two futures contracts. We trade an equally weighted portfolio of three oil spreads using four trading models: the fair value cointegration, Generalised AutoRegressive Conditional Heteroskedastic, Moving Average Convergence Divergence and Neural Network Regression (NNR) models. The motivation of this research is twofold. First, the profitability of spread markets has been tested further than the traditional fair value model. Second, the correlation filter has been extended by investigating the effect of combining inputs from both a threshold filter and a correlation filter. The results indicate that the best model type for trading spreads is the NNR, with an out-of-sample annualised percentage return of 10.76 per cent and drawdown of -1.52 per cent, resulting in a leverage factor of 7.0964 in the case of the hybrid filter. Further, the results show the hybrid filter to be a sound development, proving to be the best out-of-sample filter on the occasion it is selected. This study extends the work of Dunis et al 2 in two ways. First, we test the same trading rule models on a portfolio of three spreads, thus testing the efficiency of more markets. By looking at the drawdown and standard deviation of these portfolios, we will also be able to draw some conclusions as to the diversifying effect of spread portfolios. Journal of DerivativesThe second way we have extended previous work is by the development of a new filtering technique. Dunis et al 2 look at threshold and correlation filters, and in this study this is developed further with the hybrid filter. This filter uses a combination of inputs from both a threshold and a correlation filter to further refine the trading rules that are used. The correlation filter is explained in the section entitled 'The correlation filter', and the hybrid filter is explained in the section entitled 'The hybrid filter'.The case for spread trading has been made by many academics, most of whom call on reduced margin requirements 3-6 or consistently tradable patterns 7-10 to encourage interest in spread trading. However, these same studies fail to explicitly explain that with reduced margin comes reduced potential reward. The reason for the reduced margin when trading a spread is the reduced chance of large moves. This is because the two legs of the spread are highly correlated over the long term and will therefore move in generally the same direction.Figures A1 and A2 show the PDF of the WTI and the Brent series differences, respectively. Figure A3 shows the PDF of the WTI-Brent spread differences. It is evident 11 that the average change of the spread is smaller than the average change for either underlying by a significant amount. This validates the decision to offer a lower margin for spreads. In contrast, the kurtosis of the spread PDF is extremely high(11.48), indicating that large moves of the spread are consistent features. Further, the maximum move of the spread...

show abstract

Expiration day effects of Taiwan index futures: The case of the Singapore and Taiwan Futures Exchanges

Chung

Hseu

2008

Journal of International Financial Markets, Institutions and Mo

View full text Add to dashboard Cite

The dual listing of stock index futures: Arbitrage, spread arbitrage, and currency risk

Cited by 19 publications

References 28 publications

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Determinants of Nikkei futures mispricing in international markets: Dividend clustering, currency risk, and transaction costs

Trading and filtering futures spread portfolios: Further applications of threshold and correlation filters

Expiration day effects of Taiwan index futures: The case of the Singapore and Taiwan Futures Exchanges

Contact Info

Product

Resources

About