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An alternative approach to evaluating the agreement between financial markets

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  • Nam, Seung Oh
  • Kim, Hyun Kyung
  • Kim, Byung Chun
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    Abstract

    This research investigates that the price relationship between a stock index and its associated nearby futures markets can be explained by the cost-of-carry model using the concordance correlation (CC) coefficient in the US financial markets. The main purpose of this research is to confirm that the CC coefficient is an appropriate methodology to determine ex post arbitrage opportunities and to maximize ex ante arbitrage profits through the analysis of the price relationship derived from the cost-of-carry model. To increase the robustness of the results and to enable us to generalize our conclusions, this analysis is carried out in consideration of external uncertainty, including the marking-to-market procedure of futures contracts and the transaction cost on the stock index and its futures markets, under several assumptions related to the conditions of transactions. Examining transaction price data on the S&P 500 stock index and its futures markets shows that the CC coefficient gives a good result for ex ante arbitrage profits and is appropriate for analyzing the relationship between the observed stock index futures market price and its theoretical price derived from the cost-of-carry model.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 20 (2010)
    Issue (Month): 1 (February)
    Pages: 13-35

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    Handle: RePEc:eee:intfin:v:20:y:2010:i:1:p:13-35

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    Web page: http://www.elsevier.com/locate/intfin

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    Keywords: Concordance correlation coefficient (CC) Cost-of-carry model Ex post arbitrage opportunity Ex ante arbitrage profit Conditions of transactions;

    References

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    1. Darren Butterworth & Phil Holmes, 2000. "Mispricing in stock index futures contracts: evidence for the FTSE 100 and FTSE mid 250 contracts," Applied Economics Letters, Taylor & Francis Journals, vol. 7(12), pages 795-801.
    2. A. Craig MacKinlay, Krishna Ramaswamy, 1988. "Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 137-158.
    3. Nam, Seung Oh & Oh, SeungYoung & Kim, Hyun Kyung & Kim, Byung Chun, 2006. "An empirical analysis of the price discovery and the pricing bias in the KOSPI 200 stock index derivatives markets," International Review of Financial Analysis, Elsevier, vol. 15(4-5), pages 398-414.
    4. Cornell, Bradford & French, Kenneth R, 1983. " Taxes and the Pricing of Stock Index Futures," Journal of Finance, American Finance Association, vol. 38(3), pages 675-94, June.
    5. Gerald P. Dwyer, Jr. & Peter Locke & Wei Yu, 1995. "Index arbitrage and nonlinear dynamics between the S&P 500 futures and cash," Working Paper 95-17, Federal Reserve Bank of Atlanta.
    6. Stoll, Hans R. & Whaley, Robert E., 1990. "The Dynamics of Stock Index and Stock Index Futures Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 441-468, December.
    7. Bialkowski, Jedrzej & Jakubowski, Jacek, 2008. "Stock index futures arbitrage in emerging markets: Polish evidence," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 363-381.
    8. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
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