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Index-Futures Arbitrage in Japan. Gary Anderson Graduate School of Management University of California Riverside, CA Peter. We examine the impact of the unique Japanese stock market microstructure on the pricing of stock index futures contracts. We use intraday transa ctions data for the Nikkei Futures contracts in Osaka an d the corresponding Nikk ei Index in Toky o. Inco rpor ating more realisti c tran sacti on-c ost estimates and various institu tiona l impediments in Japan, we find that the time-varying liquidity of some component shares of the index in Tokyo represents the most critical impediment to intraday arbitrage and often causes futures prices in Osaka to deviate significantly and persistently from their no-arbitrage boundary, especially for longer-lived contracts.

G13, G14, G18 Key Word s: Stock index futur es; market micros truct ure; trans actio ns data; index arbitra ge; Short-Sa le Constraints. In this paper, we exam ine the pric ing of stoc k index futur es and the prof itabil ity of index-fu ture s arbitrage in light of the unique stock market microstructure and various institutional impediments in Japan.

Because we have access to the data only for the first three-year period after the introduction of the Nikkei Futures in Japan September through Septemberour analyses are limited to the impact stock market indian rupee market micros truct ure featu res prevai ling then in Jap an on the price discov ery proces s of stock inde x futu res.

There is growing evidence in the literatu re for the U. There are numerous real-world impediments to arbitrage trading in Japan: The tests in this study attempt to closely app roximate conditions in the Japan ese stock and futures markets.

We first incorpora te an accurate estimate of trans action costs associated w ith index arbitrage in Japan.

The compass group market share se of this paper is, therefo re, efficient market hypothesis in european stock markets unde rstan d the Japanese market microstructure, and demonstrate its impact on index futures pricing and intraday index arbitrage opportunities at the initial stage of developing the equity index futures market in Japan.

Chris moneymaker before poker find that the time-varying liquidity of some component shares of the index in Tokyo and subsequent disintegration of the stock and futures markets represent the most critical impediment to intraday arbitrage and often cause futures prices in Osaka to deviate significantly and persistently from their free stock market ebook how to invest in stocks trade arbitrage opportunities in the japanese stock and futures markets, especially for longer-lived c ontracts.

This finding is in sharp contrast to ea rlier studies for the U. Rece nt papers on the impact of market microstructure on securiti es pricing include Amihud and MendelsonAmihud, Mendels on, MurgiaFishman and LongstaffGrossma n and MillerGrunbic hler, Longstaff, and Schwa rtzHamao and HasbrouckLehmann and ModestMadhav anand Stoll and Whaley When arbitrageurs find that it is difficult or even impossible to purchase or borrow some component shares of the index, arbitrage p ressure breaks down in the ab sence of close substitutes.

Consequently, the two markets are less integrated, and the index futures prices can at times deviate significantly from the no-arbitrage boun dary, and the devi ation s can persis t. We demonst rate that, if the time-v aryin g liquidity of Nikkei stocks is ignor ed, spurious conclusions about the market efficiency and the relation between the futures and cash markets can be obtained and arbitr age opport uniti es in Japa n can be falsely ident ified.

Thusour results compl ement the importan ce attached to market microstructure in the literature. In Section 2, we describe the Nikkei Index of the TSE and the corresponding Nikkei Futures contracts traded on the OSE.

We also di scuss the transactio n cost structur e in Japan. In Section 3, we d iscuss the data. In Section 4, we document the ex tent to which the NSA future s are mispriced. In Section 5, w e discuss the various aspects of the Japanese market microstructure and tests whether they can explain the occasional surges in the estima ted mispri cing of the Nikkei futur es documen ted in Section 4.

Finall y, we summarize and conclude the paper in Section 5. Nikkei Index and Nikkei Futures Contracts. The Nikkei Index is the most widely quoted barometer of the Japanese stock market, and is the basis of the most popular futu res contr acts in Japan in terms of daily averag e volume and open inter est. Futures contracts written on the Nikkei Index have been also traded abroad on Singapore Exchange.

Refer to Bacha and Fremault-Vila for further institutional details of the Nikkei Index and its futures contracts during the study period which is similar to ours. About About Scribd Press Our blog Join our team! Contact Us Join today Invite Friends Gifts. Legal Terms Privacy Copyright. Sign up to vote on this title. You're Reading a Free Preview Download.

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