Empirical analysis on future-cash arbitrage risk with portfolio VaR

• Copula-SV-t model is used to measure the upper and lower tail dependences.
• Copula-SV-t model is used to calculate volatility of yields series of the ETF portfolio.
• An improved Delta-normal method is used to measure VaR of the arbitrage position.
• Empirical result shows that we should increase the futures position to minimize VaR.

This paper constructs the positive arbitrage position by alternating the spot index with Chinese Exchange Traded Fund (ETF) portfolio and estimating the arbitrage-free interval of futures with the latest trade data. Then, an improved Delta-normal method was used, which replaces the simple linear correlation coefficient with tail dependence correlation coefficient, to measure VaR (Value-at-risk) of the arbitrage position. Analysis of VaR implies that the risk of future-cash arbitrage is less than that of investing completely in either futures or spot market. Then according to the compositional VaR and the marginal VaR, we should increase the futures position and decrease the spot position appropriately to minimize the VaR, which can minimize risk subject to certain revenues.