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Cash-futures basis and the impact of market maturity, informed trading, and expiration effects

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  • Chang, Charles
  • Lin, Emily

Abstract

Cash-futures basis, a proxy for arbitrage opportunities, is examined, and the impact of informed trading and the changing roles of speculators and arbitrageurs are analyzed in both the non-expiration and near-expiration periods. While we observe that market frictions account to some extent for negative spreads, we also found that volatility and liquidity widen spread magnitude, suggesting that speculation dominates arbitrage in this market. Puzzlingly, we found that informed trading impacts spreads in the opposite manner, depending on whether the contract is near expiration, highlighting the importance of controlling for expiration in basis-spread tests. Finally, we construct a measure to proxy for market maturity and track these interactions throughout the course of the market's maturation.

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  • Chang, Charles & Lin, Emily, 2015. "Cash-futures basis and the impact of market maturity, informed trading, and expiration effects," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 197-213.
    • Handle: RePEc:eee:reveco:v:35:y:2015:i:c:p:197-213
    DOI: 10.1016/j.iref.2014.09.003
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    Cited by:

    1. Shamsoddini Mostafa & Shahiki Tash Mohammad N. & Khodadad-Kashi Farhad, 2016. "Measuring Information Asymmetry in Large Active Firms on the Tehran Stock Exchange," Scientific Annals of Economics and Business, Sciendo, vol. 63(3), pages 333-346, November.
    2. Chung, Kee H. & Park, Seongkyu “Gilbert” & Ryu, Doojin, 2016. "Trade duration, informed trading, and option moneyness," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 395-411.
    3. Doojin Ryu, 2017. "Comprehensive market microstructure model: considering the inventory holding costs," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 18(2), pages 183-201, March.
    4. Emily Lin & Chu-Lan Michael Kao & Natasha Sonia Adityarini, 2021. "Data-driven tree structure for PIN models," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 411-427, August.
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    More about this item

    Keywords

    Arbitrage; Speculators; Basis risk; Liquidity; Informed trading; Market maturity;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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