Mispricing of index futures contracts and short sales constraints

Futures mispricing, order imbalance, and short-selling constraints

“…Fung and Jiang (1999) examine the error-correction dynamics between the Hang Seng index and index futures, concluding those which heighten constraints on short sales associated with an increase in the price difference between futures and spot index. Fung and Draper (1999) show that lifting price restrictions on short selling reduces the frequency and magnitude of underpricing in Hang Seng index futures, and it affects how quickly the underpricing is eliminated. Fung and Draper (1999, p707) report "Futures are generally overpriced in Hong Kong (in contrast to the results of similar studies for other exchanges), and the magnitude of overpricing is greater than that of underpricing", which Draper and Fung (2003) reaffirm using data from the same market.…”

Empirical investigation of stock index futures market efficiency: the case of the Athens Derivatives Exchange

“…For the needs for our analysis we assume that all market participants can benefit from quasi-arbitrage trading (Gay andJung, 1999, Fung andDraper, 1999), so we assume that the rate of availability of short sales proceeds equals unity. For the first part of our analysis we assume zero tracking error for taking a position in a comparable stock portfolio that replicates the index and we also ignore the cost of borrowing stocks.…”

“…In accordance to previous studies (Bühler and Kempf, 1995, Neal, 1996, Fung and Draper, 1999, Tse, 2001), we assume that upon the identification of a significant mispricing, low cost traders can immediately trade the futures contract and take a position in the spot market with a time delay. Using evidence from previous studies (i.e.…”

“…In the case of the nearest FTASE contract, when index trade execution is done with the closing price (C), there is a minor decrease in the number of futures overpricing and (especially) underpricing cases for both category of traders. This is in contrast to Bühler and Kempf (1995) who observe a large number of economically significant mispricings that disappear quickly because of arbitrage trading (see also Fung andDraper, 1999, andTse, 2001). In addition, Dwyer et al (1996) report for the S&P 500 futures that as the market becomes more mature (exchange trading history becomes larger) mispricing rates are exploited in a shorter amount of time.…”

Stochastic Dominance and Investors’ Behavior towards Risk: The Hong Kong Stocks and Futures Markets

“…For example, Ho et al (1992) investigate the intra-day arbitrage opportunities and price behavior of the Hang Seng Index Futures, Fung et al (1997) examine the intra-day patterns of the Hang Seng Index Futures, Fung and Draper (1999) study the mispricing of the Hang Seng Index Futures under short sales constraints, and Cheng et al (2000) examine the impact of the 1997 Asian financial crisis on index futures markets. In addition, So and Tse (2004) examine the price discovery process among the Hang Seng Index markets.…”