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Financially constrained index futures arbitrage

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  • Kristoffer Glover
  • Hardy Hulley

Abstract

We develop two models for index futures arbitrage that take the financing constraints faced by real‐world arbitrageurs into account. Our models predict that the price of an index futures contract and the value of its underlying index should deviate further from their theoretical cost‐of‐carry relationship when (a) the contract has a long time to go before expiry, and (b) volatility is high. The fact that these predictions enjoy considerable empirical support highlights the importance of financing constraints for explaining index futures mispricing.

Suggested Citation

  • Kristoffer Glover & Hardy Hulley, 2022. "Financially constrained index futures arbitrage," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(9), pages 1688-1703, September.
    • Handle: RePEc:wly:jfutmk:v:42:y:2022:i:9:p:1688-1703
    DOI: 10.1002/fut.22293
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    References listed on IDEAS

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