Examining the Strength of Comovement of Prices in Futures and Cash Markets: Evidence from India
Published: 2014
Author(s) Name: Kapil Gupta, Balwinder Singh |
Author(s) Affiliation: Dr. Kapil is Asst. Prof. at PTU, Punjab; Dr. Balwinder is Associate Prof. at GNDU, Amritsar, India
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Abstract
The present study examines the arbitrage efficiency
of the Indian equity market by using the daily closing
prices of near month futures contracts and cash market.
Substantial and sustained wave like mispricings in
two markets have been observed, which provides
exploitable arbitrage opportunities to the traders.
However, due to mark-to-market these mispricings
do not persist over long period. Moreover, it has been
observed that are positively correlated with the time-tomaturity
of the futures contracts, which suggests that
strong arbitrage base is present in the market. Mean
reverting behaviour of mispricings also suggest that
early liquidation option may be more profitable than
holding the positions until the expiry date.
Keywords: Cost of carry model, Mispricings,Mean reversion, Early unwinding of open positions and liquidity
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