Mispricing Persistence and the Effectiveness of Arbitrage Trading

Alphonse, Pascal

Volume 11, Numbers 1 & 2 / March/June , Pages 1-156

Multinational Finance Journal, 2007, vol. 11, no. 1/2, pp.123-156

Pascal Alphonse , Lille School of Management, University of Lille 2, France Corresponding Author

Abstract:
This article examines whether mean reversion in stock index basis changes is actually induced by arbitrage trading, using intra-day arbitrage trade data. The empirical evidence suggests that arbitrage trading alone cannot account for all of the mean reversion in basis changes, even when infrequent trading is controlled for. This general mean reversion is consistent with mean reversion in liquidity and partial adjustment in the cash market. The behavior of arbitrageurs appears highly competitive. We find that on average the net arbitrage profit is at the competitive level of zero. Furthermore, it is suggested that some mispricing persistence may be related to time-varying liquidity. Accordingly, the results indicate that arbitrageurs pay attention to the depth of the market and value the early unwinding option

Keywords : market microstructure; arbitrage trading; liquidity; stock index futures; market efficiency
View in Bib TeX Format View Cite Format 1 View Cite Format 2