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Arbitrage, Nontrading, and Stale Prices: October 1987

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  • Kleidon, Allan W

Abstract

This article explains a puzzle created by the Standard and Poor's 500 cash and futures prices during the crash of October 1987. The cash index appears to be a moving average of the futures, but nontrading in constituent stocks explains only the initial period of delayed openings. However, execution of stale limit buy orders, given the high volume and NYSE market mechanisms at the time, resulted in extraordinary levels of stock prices that were not caused by nontrading. The model is supported in aggregate S&P data and transactions data for individual stocks. Copyright 1992 by University of Chicago Press.

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  • Kleidon, Allan W, 1992. "Arbitrage, Nontrading, and Stale Prices: October 1987," The Journal of Business, University of Chicago Press, vol. 65(4), pages 483-507, October.
    • Handle: RePEc:ucp:jnlbus:v:65:y:1992:i:4:p:483-507
    DOI: 10.1086/296582
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    Cited by:

    1. Krause, Timothy & Tse, Yiuman, 2013. "Volatility and return spillovers in Canadian and U.S. industry ETFs," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 244-259.
    2. Roman Kozhan & Wing Wah Tham, 2012. "Execution Risk in High-Frequency Arbitrage," Management Science, INFORMS, vol. 58(11), pages 2131-2149, November.
    3. Joseph K.W. Fung, 2006. "Order Imbalance and the Pricing of Index Futures," Working Papers 132006, Hong Kong Institute for Monetary Research.
    4. 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.
    5. Nicholas Taylor, 2007. "A New Econometric Model of Index Arbitrage," European Financial Management, European Financial Management Association, vol. 13(1), pages 159-183, January.
    6. Chin‐Ho Chen & Junmao Chiu & Huimin Chung, 2020. "Arbitrage opportunities, liquidity provision, and trader types in an index option market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 279-307, March.
    7. Beaulieu, Marie-Claude, 1998. "Time to maturity in the basis of stock market indices: Evidence from the S&P 500 and the MMI," Journal of Empirical Finance, Elsevier, vol. 5(3), pages 177-195, September.
    8. J Fedderke & Michelle Joao, 2001. "Arbitrage, Cointegration And Efficiency In Financial Markets In The Presence Of Financial Crises," South African Journal of Economics, Economic Society of South Africa, vol. 69(3), pages 366-384, September.

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