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 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.
WU, Chunchi and He, Yan.
Further Evidence on Mean Reversion in Index Basis Changes. (2001). Financial Review. 36, (1), 95-124. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/796