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Mean Reversion of Standard & Poor's 500 Index Basis Changes: Arbitrage-Induced or Statistical Illusion?

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  • Miller, Merton H
  • Muthuswamy, Jayaram
  • Whaley, Robert E

Abstract

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. The authors propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. The authors' analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced. Copyright 1994 by American Finance Association.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 49 (1994)
Issue (Month): 2 (June)
Pages: 479-513
Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Handle: RePEc:bla:jfinan:v:49:y:1994:i:2:p:479-513

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Cited by:
  1. G.S Morgan & Peter N. Smith & S.H. Thomas, . "Portfolio return autocorrelation and non-synchronous trading in UK equities," Discussion Papers 00/46, Department of Economics, University of York.
  2. Anderson, H.M. & Vahid, F., 2001. "Market Architecture and Nonlinear Dynamics of Australian Stock and Future Indices," Monash Econometrics and Business Statistics Working Papers 3/01, Monash University, Department of Econometrics and Business Statistics.
  3. Chin, Wencheong, 2008. "Spurious long-range dependence: evidence from Malaysian equity markets," MPRA Paper 7914, University Library of Munich, Germany.
  4. Joel Hasbrouck & Duane J. Seppi, 1998. "Common Factors in Prices, Order Flows and Liquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-011, New York University, Leonard N. Stern School of Business-.
  5. Juan A. Lafuente & Manuel Illueca Muñoz, 2003. "The Effect Of Futures Trading Activity On The Distribution Of Spot Market Returns," Working Papers. Serie EC 2003-23, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  6. Giorgio Valente & Lucio Sarno, 2005. "Modelling and forecasting stock returns: exploiting the futures market, regime shifts and international spillovers," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 345-376.
  7. Joseph K.W. Fung & Philip Yu, 2007. "Order Imbalance and the Dynamics of Index and Futures Prices," Working Papers 072007, Hong Kong Institute for Monetary Research.
  8. Joseph K.W. Fung, 2006. "Order Imbalance and the Pricing of Index Futures," Working Papers 132006, Hong Kong Institute for Monetary Research.
  9. Helder Sebastião, 2008. "The partial adjustment factors of FTSE 100 stock index and stock index futures: The informational impact of electronic trading systems," GEMF Working Papers 2008-07, GEMF - Faculdade de Economia, Universidade de Coimbra.
  10. A. Abhyankar & L. S. Copeland & W. Wong, 1999. "LIFFE cycles: intraday evidence from the FTSE-100 Stock Index futures market," European Journal of Finance, Taylor and Francis Journals, vol. 5(2), pages 123-139.
  11. Laurent Deville, 2008. "Exchange Traded Funds: History, Trading and Research," Post-Print halshs-00162223, HAL.

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