Article ID Journal Published Year Pages File Type
7362556 Journal of Financial Markets 2017 43 Pages PDF
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.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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