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On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment

Citation

Han, J and Pan, Z, On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment, Journal of Financial Markets pp. 1-17. ISSN 1386-4181 (In Press) [Refereed Article]


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DOI: doi:10.1016/j.finmar.2016.12.002

Abstract

As a response to the 2015 Chinese stock market crash, regulators prohibited arbitrage activities in the index futures and cash markets. We use this natural experiment to test the hypothesis that liquidity and pricing efficiency causally affect each other. We find that resulting shift in the arbitrage boundary led to the breakdown of the two-way causality relation between liquidity and the absolute futures-cash basis. We thus confirm that the relation between liquidity and the absolute futures-cash basis is not driven by the omitted variable bias, but is indeed due to arbitrage.

Item Details

Item Type:Refereed Article
Keywords:futures-cash basis, liquidity, trading restrictions, arbitrage
Research Division:Commerce, Management, Tourism and Services
Research Group:Banking, Finance and Investment
Research Field:Finance
Objective Division:Commercial Services and Tourism
Objective Group:Financial Services
Objective Field:Finance Services
Author:Han, J (Mr Jianlei Han)
ID Code:118528
Year Published:In Press
Deposited By:Tasmanian School of Business and Economics
Deposited On:2017-07-13
Last Modified:2017-07-13
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