Hedging with Mispriced Futures

Testing index futures market efficiency using price differences: A critical analysis

“…Studies on index futures markets based on the levels of futures prices (like Merrick (1988Merrick ( , 1989, Mackinlay and Ramaswamy (1988), Yadav and Pope (1990)) attempt to identify opportunities for riskless excess returns using trading rules which exploit the known change in cash futures basis between the day of the trade and the expiration day. The relevant measure of efficiency in these studies is implicitly or explicitly the numbei.…”

“…Inferences based only on the regression line can obviously mask significant features of the data-in particular the systematic patterns in mispricing returns (i.e., the regression residuals). For example, Merrick (1988) (for US. data) and Yadav and Pope (1990) (for U.K. data) report that the returns on one-day hedges are significant and positive (negative) if such hedges are established when mispricing is initially positive (negative) even though the average returns on oneday hedges are zero.…”

“…Then following Merrick (1988) the scaled change in futures mispricing or mispricing "return" R f can be written as:…”

Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze

“…In particular, squeeze-generated sustained price distortions erode the beneficial economic role of futures markets by significantly reducing the effectiveness of the contract for hedging (see, e.g., Figlewski, 1984;Merrick, 1988). Moreover, because of the high volume of futures trading, a much larger market population feels the adverse impact of delivery squeezes relative to a cash market squeeze in any particular issue.…”

Pascal spreading of short-term interest rate contracts

“…Here, thinking first about multidimensional 1 Working (1962) emphasized the interplay of carrying charge mispricings and hedging. See Merrick (1988) for an empirical study of returns on stock portfolio hedges with initially mispriced stock index futures contracts.…”