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Intraday and Interday Basis Dynamics: Evidence from the FTSE 100 Index Futures Market

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Author Info

  • Garrett Ian

    (University of Manchester)

  • Taylor Nicholas

    (Cardiff University)

Abstract

We examine the intraday and interday dynamics of both the level of and changes in the FTSE (Financial Times-Stock Exchange) 100 index futures mispricing. Like numerous previous studies we find significant evidence of mean reversion and hence predictability in mispricing changes measured over high (minute-by-minute) and low (daily) frequencies. Contrary to other studies we show explicitly that for high-frequency data, this predictability is due not to microstructure effects but to arbitrage activity. Using a threshold autoregressive model that is consistent with arbitrage behavior, we show that such models imply first-order autocorrelation in mispricing changes similar in magnitude to that actually observed. For low-frequency data, we show that predictability is driven neither by arbitrage activity nor by microstructure effects. Rather, it is a statistical illusion that is the result of overdifferencing a trend-stationary series.

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File URL: http://www.degruyter.com/view/j/snde.2001.5.2/snde.2001.5.2.1076/snde.2001.5.2.1076.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 5 (2001)
Issue (Month): 2 (July)
Pages: 1-22

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Handle: RePEc:bpj:sndecm:v:5:y:2001:i:2:n:3

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Web page: http://www.degruyter.com

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Cited by:
  1. Taylor, Nicholas, 2004. "Trading intensity, volatility, and arbitrage activity," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 1137-1162, May.

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