Abstract

We examine the intraday and interday dynamics of both the level of and changes in the FTSE (Financial Times-Stock Exchange) 100 index futures mispricing. Like numerous previous studies we find significant evidence of mean reversion and hence predictability in mispricing changes measured over high (minute-by-minute) and low (daily) frequencies. Contrary to other studies we show explicitly that for high-frequency data, this predictability is due not to microstructure effects but to arbitrage activity. Using a threshold autoregressive model that is consistent with arbitrage behavior, we show that such models imply first-order autocorrelation in mispricing changes similar in magnitude to that actually observed. For low-frequency data, we show that predictability is driven neither by arbitrage activity nor by microstructure effects. Rather, it is a statistical illusion that is the result of overdifferencing a trend-stationary series.

Recommended Citation

Ian Garrett and Nicholas Taylor (2001) "Intraday and Interday Basis Dynamics: Evidence from the FTSE 100 Index Futures Market ", Studies in Nonlinear Dynamics & Econometrics: Vol. 5: No. 2, Article 3.
http://www.bepress.com/snde/vol5/iss2/art3

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