Index Arbitrage between Futures and ETFs: Evidence on the limits to arbitrage from S&P 500 Futures and SPDRs (original) (raw)
This paper examines the spot-futures pricing and arbitrage relationships by using both the SPDR and the S&P 500 cash index as the "underlying cash asset." Conceptually the S&P 500 futures should track the basket of stocks in the index, based on their weights in the index. However, using such a portfolio is expensive. Using the SPDR as the cash asset examines whether a liquid tradable single asset can be used for pricing and arbitrage purposes. We also use futures volume data to identify whether sufficient trading exists to execute a strategy at a given arbitrage price to exploit any futures mispricings. The analysis examines how long mispricing lasts and the impact of volatility on mispricing. Our results show that mispricings exist regardless of the choice of underlying asset. We find more negative mispricings using the SPDR and more positive mispricings using the S&P 500 cash index, but the former disappear more rapidly as the size of transactions costs is increased. Furthermore, we find that mispricings are far more frequent in high volatility months than in low volatility months, but the length of time that a mispricing exists and the associated volume appear to be unrelated to the monthly level of volatility.
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