A Transactions Data Test of Stock Index Futures Market Efficiency and Index Arbitrage Profitability



    Search for more papers by this author
    • Graduate School of Management, University of California, Riverside. This paper is based on my dissertation at the Ohio State University. Special thanks are due to Professor René Stulz, my committee chairman, and Professor Warren Bailey for their encouragement and help. I would also like to thank two anonymous referees, Steve Buser (the editor), K. C. Chan, Francis Longstaff, David Mayers, Eduardo Schwartz, Marti Subrahmanyam, Ralph Walking, and participants at the 1988 American Finance Association Annual Meeting in New York and finance seminars at Boston College, Georgia Tech, Illinois-Urbana/Champaign, Ohio State, Penn State, Rhode Island, Texas A&M, UC-Riverside, Wayne State, and York for their comments and suggestions. I am also indebted to my colleagues, Kalok Chan and Tong S. Kim, for helpful discussions and assistance. I am grateful to Paulette Slater at the New York Stock Exchange for her help in obtaining the data. Research grants from the College of Business and the Graduate School of the Ohio State University are gratefully acknowledged.


This paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for The Chicago Board of Trade's Major Market Index contracts. The spot value of the index is computed with transactions prices for the component shares of the index obtained from the Fitch database. The tests account for transaction costs, execution lags, and the uptick rule for short sales of stocks. Results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time.