Further Evidence on Mean Reversion in Index Basis Changes

Publication Type

Journal Article

Publication Date

2001

Abstract

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.

Discipline

Business

Research Areas

Finance

Publication

Financial Review

Volume

36

Issue

1

First Page

95

Last Page

124

ISSN

0732-8516

Identifier

10.1111/j.1540-6288.2001.tb00006.x

Publisher

Wiley

Additional URL

https://doi.org/10.1111/j.1540-6288.2001.tb00006.x

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