The October 1987 S&P 500 Stock-Futures Basis



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    • Associate Professor of Finance and Business Economics, University of Southern California. Numerous individuals were very helpful in providing me the data necessary to undertake this study. They include J. Kimball Dietrich, of the U.S. Department of the Treasury (visiting), Kenneth Lehn, Chief Economist of the U.S. Securities and Exchange Commission, Bill MacDonald of the SEC, Ken Cone of the Chicago Mercantile Exchange, Jeremy Evnine of Wells Fargo Investment Advisors, and others unknown to me. Their assistance is greatly appreciated. The final version of the paper benefited from discussions in seminars at the SEC, the CFTC, the Fuqua School at Duke, and the Graduate School of Business at NYU. Other editorial suggestions were also provided by the editor, the referee, and Eduardo Schwartz. All remaining errors and all opinions are mine only. Partial financial support for this research was provided by the Mid America Institute for Public Policy Research, for which I am grateful.


Five-minute changes in the S&P 500 index and futures contract are examined over a ten-day period surrounding the October 1987 stock market crash. Since nonsynchronous trading problems are severe in these data, new index estimators are derived and used. The estimators use the complete transaction history of all 500 stocks. Nonsynchronous trading explains part of the large absolute futures-cash basis observed during the crash. The remainder may be due to disintegration of the two markets. Even after adjustment for nonsynchronous trading, the index displays more autocorrelation than does the futures and the futures leads the index.