Index futures arbitrage before and after the introduction of sixteenths on the NYSE |
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| Institution: | 2. Department of Economics, Accounting and Statistics, University of Palermo, 90128 Palermo, Italy;1. Statistics Department, Universidad Carlos III de Madrid, C/Madrid, 126, 28903 Getafe, Spain;2. Instituto Flores de Lemus (Universidad Carlos III de Madrid), Finance Research Centre-Unide, Avenida das Forças Armadas, 1600-083 Lisboa, Portugal;1. Goethe University Frankfurt, Germany;2. Banco de Portugal, Portugal;3. Universidade Nova de Lisboa, Portugal;4. CEFAGE, Portugal;5. University of Alicante, Spain;1. Department of Accounting and Information Management, The University of Tennessee, 630 Stokely Management Center, Knoxville, TN37996-0550, United States;2. Richard C. Adkerson School of Accountancy, College of Business, Mississippi State University, P.O. Box EF, Mississippi State, MS 39762, United States |
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| Abstract: | We find that market efficiency increased and the arbitrage link between index futures and the stock market strengthened after June 24, 1997, when the New York Stock Exchange reduced the minimum change for stock prices and quotes from an eighth to a sixteenth of a dollar. There has been a substantial increase in the number of arbitrage trades reported to the Securities and Exchange Commission (SEC) since the reduction in the minimum price increment. The average number of stocks traded and the average dollar amount underlying each arbitrage trade increases and decreases, respectively. The average index futures mispricing error (MPE) that triggers arbitrage is lower and reverts to zero more quickly. |
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