Abstract
The no-arbitrage condition is a cornerstone concept in financial market research. However, the arbitrage mechanism that is inherent in the trading process for related securities, is not readily observable. We develop a generalized smooth-transition vector error-correction model, or GST-VECM, to estimate the arbitrage mechanism from financial market data. The GST-VECM can (i) back out the implied no-arbitrage band, (ii) estimate arbitrage intensity for upper and lower bound violations, and (iii) accommodate convergence risk for statistical arbitrage. Using the introduction of CSI300 ETF trading in China as a natural experiment, we estimate the GST-VECM to reveal some insight into how a microstructural policy, by altering the index arbitrage mechanism, affects the pricing link between spot and futures markets.
| Original language | English |
|---|---|
| Pages (from-to) | 468-483 |
| Number of pages | 16 |
| Journal | Journal of Econometrics |
| Volume | 222 |
| Issue number | 1 |
| DOIs | |
| Publication status | Published - May 2021 |
Keywords
- Carry-cost adjusted basis
- Limits to arbitrage
- No-arbitrage band
Fingerprint
Dive into the research topics of 'The implied arbitrage mechanism in financial markets'. Together they form a unique fingerprint.Cite this
- APA
- Author
- BIBTEX
- Harvard
- Standard
- RIS
- Vancouver