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http://hdl.handle.net/2451/27224
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| Title: | Program Trading and Stock Index Arbitrage |
| Authors: | Canina, Linda
Figlewski, Stephen |
| Issue Date: | 1994 |
| Series/Report no.: | FIN-94-023 |
| Abstract: | Stock index futures and program trading are among the most important
financial market innovations of the 1980s. This chapter surveys the
literature and provides an overview of the somewhat controversial area
of index arbitrage. We begin with a description of how index futures
work, how they should be priced in equilibrium according to the
“cost of carry” model, and how index arbitrage works to
enforce the theoretical pricing relationship. In theory, index arbitrage
is riskless, but we describe how it is affected in practice by
transactions costs, execution risk, capital and short sales constraints,
and the possibility of unwinding profitable trades before futures
expiration. We end with a discussion of the impact of index futures and
arbitrage on the volatility of the underlying stock market. |
| URI: | http://hdl.handle.net/2451/27224 |
| Appears in Collections: | Finance Working Papers
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