The profitability of index futures arbitrage: Evidence from bid-ask quotes

Kee Hong BAE, Kalok CHAN, Yan Leung Stephen CHEUNG

Research output: Contribution to journalArticlespeer-review

14 Citations (Scopus)

Abstract

Previous studies investigated the profitability of stock index futures based on transaction price data, and could overstate the frequency of arbitrage opportunities and size of arbitrage profits. This article obtains a data base for the Hong Kong index futures and index options market that contains both real-time transaction prices and bid-ask quotes; the article further examines the bias of identifying arbitrage opportunities based on transaction prices. The article finds the percentage of observations violating no-arbitrage bounds is significantly reduced when bid-ask quotes are employed instead of transaction prices. This suggests studies that implement arbitrage strategies based on transaction prices employ prices from the wrong side of the spread. This article finds a relationship between the frequency of violations (evaluated from transaction prices) and the size of bid-ask spreads in the futures and options markets. This phenomenon indicates that a larger mispricing, which may arise when the bid-ask spread is wider, does not necessarily imply profitable arbitrage opportunity. Copyright © 1998 by John Wiley & Sons, Inc. 

Original languageEnglish
Pages (from-to)743-763
JournalJournal of Futures Markets
Volume18
Issue number7
DOIs
Publication statusPublished - 01 Jan 1998

Citation

Bae, K.-H., Chan, K., & Cheung, Y.-L. (1998). The profitability of index futures arbitrage: Evidence from bid-ask quotes. Journal of Futures Markets, 18(7), 743-763.

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