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On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment
Han, J and Pan, Z, On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment, Journal of Financial Markets, 36 pp. 115-131. ISSN 1386-4181 (2016) [Refereed Article]
Copyright 2016 Elsevier B.V.
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 Type:||Refereed Article|
|Keywords:||futures-cash basis, liquidity, trading restrictions, arbitrage|
|Research Division:||Commerce, Management, Tourism and Services|
|Research Group:||Banking, finance and investment|
|Objective Division:||Commercial Services and Tourism|
|Objective Group:||Financial services|
|Objective Field:||Finance services|
|UTAS Author:||Han, J (Mr Jianlei Han)|
|Web of Science® Times Cited:||7|
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