Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia.      

Pairs trading based on statistical variability of the spread process

This research proposes a new non-parametric approach to pairs trading based on renko and kagi constructions which originated from Japanese charting indicators and were introduced to academic studies by Pastukhov. The method exploits statistical information about the variability of the tradable process. The approach does not find a long-run mean of the process and trade towards it like other methods of pairs trading. The only assumption we need is that the statistical properties of the spread process volatility remain reasonably constant. The theoretical profitability of the method has been demonstrated for the Ornstein–Uhlenbeck process. Tests on the daily market data of American and Australian stock exchanges show statistically significant average excess returns ranging from 1.4 to 3.6% per month and annualized Sharpe ratio from 1.5 to 3.4.     

An experimental study on real-options strategies

We conduct a laboratory experiment to study whether people intuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make production decisions in response to a simulated mean-reverting oil price. Using cluster analysis, participants can be classified into four groups, which we label ‘mean-reverting’, ‘Brownian motion real-option’, ‘Brownian motion myopic real-option’, and ‘ambiguous’. We find two behavioral biases in the strategies of our participants: ignoring the mean-reverting process, and myopic behavior. Both lead to too frequent switches when compared with the theoretical benchmark. We also find that the last group behaved as if they have learned to incorporate the true underlying process into their decisions, and improved their decisions during the later stage.     

The impact of multilateral trading facilities on price discovery: Further evidence from the European markets

This study examines relative price discovery for three major European indices, FTSE, CAC, and DAX, their futures and exchange traded funds (ETFs) using the data on 5‐minute intraday transaction prices over a four‐year period. We computed both Hasbrouck (1995) information share with error bounds and Gonzalo and Granger's (1995) common factor weights approach. Gonzalo and Granger's (1995) common factor weights suggest the index futures contracts play a dominant role in price discovery in the CAC market: the CAC 40 index futures lead the price discovery and Lyxor CAC 40 ETFs serving the second resort for information transmission. This could be due to the less frequent trading of ETFs. More importantly, CAC40 under the Gonzalo & Granger (1995) test shows upper and lower error bounds in good range may be the main reason to drive for the meaningful results. In contrast, the upper and lower bounds estimated from the Hasbrouck (1995) are far distant for most cases. Finally, FTSE and DAX markets offer compelling evidence to show that ETFs lead price discovery and spots and futures follows.