Home / Regular Issue / JTAS Vol. 8 (2) Sep. 2000 / JSSH-0127-2000


Price Efficiency of Stock Index Futures Contracts: Are There Any Arbitrage Opportunities?

Shamsher Mohamad & Taufiq Hassan

Pertanika Journal of Tropical Agricultural Science, Volume 8, Issue 2, September 2000

Keywords: Stock index futures, price efficiency, arbitrage, short-selling

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A futures contract is an agreement between a seller and a buyer that calls for the seller to deliver to the buyer a specified quantity and grade of an identified commodity, at a fixed time in the future, and at a price agreed in the contract. Stock index futures contract specify an equity index as the underlying asset. Arbitrage opportunity exists when the actual futures price deviates from the fair price by more than transactions costs. This study measures the arbitrage opportunities on the daily FKLI contracts price from calendar years 1996 through 1999. The pricing efficiency of the futures contracts was determined by the standard error between the closing actual and theoretical fair values for each month FKLI futures contract, where the theoretical value was estimated using the cost-of-carry model. The findings show that the actual futures prices do not converge towards theoretical prices with the passage of time. Arbitrage opportunities are consistently available for traders who have full use of proceeds. One crucial assumption driving this result is the ability to sell short the cash index (or a subset of stocks in the KLSE CI). The results also reveal that the stock index futures contract pricing is not monotonic but rather varies over time with periods of both greater and lesser efficiency.

ISSN 1511-3701

e-ISSN 2231-8542

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