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A threshold error-correction model for intraday futures and index returns

  • Martin Martens

    (Department of Accounting and Finance, Lancaster University, Lancaster LA1 4YX, UK)

  • Paul Kofman

    (School of Banking and Finance, The University of New South Wales, Sydney, NSW 2052, Australia)

  • Ton C. F. Vorst

    (Department of Finance, Erasmus University Rotterdam and Erasmus Center for Financial Research,PO Box 1738, 3000 DR Rotterdam, The Netherlands)

Index-futures arbitragers only enter into the market if the deviation from the arbitrage relation is sufficiently large to compensate for transaction costs and associated interest rate and dividend risks. We estimate the band around the theoretical futures price within which arbitrage is not profitable for most arbitragers, using a threshold autoregression model. Combining these thresholds with an error-correction model, we show that the impact of the mispricing error is increasing with the magnitude of that error and that the information effect of lagged futures returns on index returns is significantly larger when the mispricing error is negative. © 1998 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 13 (1998)
Issue (Month): 3 ()
Pages: 245-263

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Handle: RePEc:jae:japmet:v:13:y:1998:i:3:p:245-263
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