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On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment
journal contribution
posted on 2023-05-19, 07:32 authored by Han, J, Pan, ZAs 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.
History
Publication title
Journal of Financial MarketsVolume
36Pagination
115-131ISSN
1386-4181Department/School
TSBEPublisher
Elsevier Science BvPlace of publication
Po Box 211, Amsterdam, Netherlands, 1000 AeRights statement
Copyright 2016 Elsevier B.V.Repository Status
- Restricted