Further Evidence on Mean Reversion in Index Basis Changes

Further evidence on the stochastic behavior of the futures minus cash index basis is provided. In addition to infrequent trading, index aggregation is identified as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving a...

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Bibliographic Details
Main Authors: WU, Chunchi, He, Yan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2001
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/796
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Institution: Singapore Management University
Language: English
Description
Summary:Further evidence on the stochastic behavior of the futures minus cash index basis is provided. In addition to infrequent trading, index aggregation is identified as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelation in basis changes. Empirical results show that index price and basis changes often contain a moving average component. After the effects of infrequent trading and index aggregation are purged, it is found that the autocorrelation of the adjusted index basis changes is significantly reduced.