Transactions costs, index arbitrage and non-linear dynamics between ftse100 spot and futures: A threshold cointegration analysis

Juan Tao; Christopher J. Green

doi:10.1002/ijfe.463

Transactions costs, index arbitrage and non-linear dynamics between ftse100 spot and futures: A threshold cointegration analysis

Juan Tao^*, Christopher J. Green

^*Corresponding author for this work

Department of Finance

Loughborough University

Research output: Contribution to journal › Article › peer-review

2 Citations (Scopus)

Abstract

We apply threshold cointegration to study the dynamics between the London FTSE100 spot index and its futures price, using percentage mispricing as the threshold variable to identify the no-arbitrage band. Estimated asymmetries in the band suggest that short sale restrictions in the spot market represent a hurdle for arbitrage. Factors other than transactions costs did not affect the width of the no-arbitrage band but did affect the price dynamics more directly. The evidence supports a conclusion that LSE SETS (1997) and LIFFE CONNECT (1998) trading systems reduced transactions costs and hence the width of the no-arbitrage band.

Original language	English
Pages (from-to)	175-187
Number of pages	13
Journal	International Journal of Finance and Economics
Volume	18
Issue number	2
DOIs	https://doi.org/10.1002/ijfe.463
Publication status	Published - Mar 2013

Keywords

FTSE100
Index futures
Threshold cointegration

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10.1002/ijfe.463

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abstract = "We apply threshold cointegration to study the dynamics between the London FTSE100 spot index and its futures price, using percentage mispricing as the threshold variable to identify the no-arbitrage band. Estimated asymmetries in the band suggest that short sale restrictions in the spot market represent a hurdle for arbitrage. Factors other than transactions costs did not affect the width of the no-arbitrage band but did affect the price dynamics more directly. The evidence supports a conclusion that LSE SETS (1997) and LIFFE CONNECT (1998) trading systems reduced transactions costs and hence the width of the no-arbitrage band.",

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Transactions costs, index arbitrage and non-linear dynamics between ftse100 spot and futures: A threshold cointegration analysis

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Keywords

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