No abstract

No abstract

Examination is made of the relative contributions to price discovery of the floor and electronically traded euro FX and Japanese yen futures markets and the corresponding retail on-line foreign exchange spot markets. GLOBEX electronic futures contracts provide the most price discovery in the euro; the on-line trading spot market provides the most in the Japanese yen. The floor-traded futures markets contribute the least to price discovery in both the euro and the Japanese yen markets. The overall results show that electronic trading platforms facilitate price discovery more efficiently than floor trading. Futures traders may also extract information from on-line spot prices.

No abstract

We can infer from bidfask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bidfask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bidfask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE-100 Index futures and the FTSE-100 European index options contracts. This study uses the put-call-futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time-stamped transaction data. This study allows for realistic trading and market-impact costs. The feasibility of strategies such as execute-and-hold and early unwinding is Index options (ESX) eliminate the possibility of early exercise in the option leg of the arbitrage portfolio.This study uses time-stamped bid-ask quotes and traded prices for both contracts. The data permit the matching of traded prices within narrow time intervals of 1 min. This reduces the nonsynchronous price problem. We allow for trading and market-impact costs, with market-impact costs determined from bid-ask quotes. The feasibility of execute-andhold and early-unwinding strategies is examined with ex-post and ex-ante simulation tests. This study also examines whether there is any significant intraday variation in the pattern of the distribution of mispricings. The ex-ante simulations allow for possible execution time lags in establishing each leg of the arbitrage trade. The relationship between arbitrage profit and spread costs, time to maturity, types of strategies adopted, and market volatility (as implied by the futures and options prices) is also examined.This study reveals that the occurrence of matched put-call-futures trios exhibits a U-shaped intraday pattern, with concentrations at both open and close. The magnitude of the observed mispricings, however, has no discernible intraday pattern. 4 This study finds ex-post arbitrage profits for traders facing transaction costs are limited and generally are rapidly extinguished in less than 3 min. Profits are larger the greater the spread, volatility, and time to maturity are, but the average ex-post profit is very close to the ex-ante profit for lags of less than 3 min. Long-futures trades are marginally more profitable than short-futures strategies. Early unwinding may also be profitable, but for traders facing even low levels of transaction costs, the number of opportunities is small.The results provide important confirmation for the results derived by Lee and Nayar (1993) and Fung and Chan (1994) for the Standard and Poor's (S&P) 500 and by Fung and Fung (1997a) for the Hong Kong Hang Seng Index. All three markets exhibit market efficiency and are consistent with the conclusions of Fleming, Ostdiek, and Whaley (1996), who found that traders p...

1160Draper and Fung 1 Naranjo and Nimalendran (2000) find that the Federal Reserve and the Bundesbank intervened in the dollar-mark market on 704 and 1,166 days, respectively, out of 4,723 trading days between January 1976 and December 1994. 2 The Taiwan government occasionally intervenes in the market through the operation of a stock market support fund. The interventions are of relatively small magnitude. the pricing relationship between the Hang Seng Index futures and the cash index during the period of the Asian financial crisis. The study avoids infrequent trading and nonexecution problems by using tradeable bid and offer quotes for the constituent stocks of the index. The results show that arbitrage efficiency was impeded during, and in the immediate aftermath of, the intervention. The findings suggest that discretionary government action introduces an additional risk factor for arbitrageurs that continues to disrupt normal market processes even after the government ceases to intervene. The continued disruption following the government's actions in the market also stems from a poorly developed stock loan market that impedes short selling, as well as a lack of liquidity in the market.

This study examines whether the direction and magnitude of the aggregate order-imbalance of the index stocks can explain the arbitrage spread between index futures and the underlying cash index. The data are for the Asian financial crisis period and hence entail wide variations in order imbalance and the index-futures basis. The analysis controls for realistic trading costs and actual dividend payments. The results indicate that the arbitrage spread is positively related to the aggregate order imbalance in the underlying index stocks; negative order-imbalance has a stronger impact than positive order imbalance.Violations of the upper no-arbitrage bound are related to positive order imbalance and violations of the lower no-arbitrage bound are related to negative order imbalance. Asymmetric response times to negative and positive spreads can be attributed to the difficulty, cost, and risk of short stock arbitrage when the futures is below its no-arbitrage value. The significant relationship between order imbalance and arbitrage spread confirm that index arbitrageurs are important providers of liquidity in the futures market when the stock market is in disequilibrium.