The pricing and performance of stock index futures spreads

• Published in: The journal of futures markets Vol. 8; no. 3; pp. 303 - 318
• Main Authors: Billingsley, Randall S., Chance, Don M.
• Format: Journal Article
• Language: English
• Published: New York Wiley Subscription Services, Inc., A Wiley Company 01.06.1988; Published by J. Wiley in affiliation with the Center for the Study of Futures Markets, Columbia University; Wiley Periodicals Inc
• Subjects: Arbitrage; Costs; Dividends; Futures; Futures market; Investments; Portfolio performance; Prices; Sales; Short sales; Spread; Statistical analysis; Stock exchanges; Stock index futures; Stock prices; Studies; Theory; Volatility
• ISSN: 0270-7314; 1096-9934
• DOI: 10.1002/fut.3990080305

An attempt is made to examine the extent to which intermarket and intramarket stock index futures spreads are priced consistent with the theoretical no-arbitrage conditions. Data consist of the Friday settlement prices for each week for the Chicago Mercantile Exchange's Standard & Poor's (S&P) 500 futures contract from April 23, 1982, through January 31, 1986; these contracts are used to test intramarket spread relationships. Intermarket spreads are tested by buying the nearby S&P contract and selling the New York Futures Exchange New York Stock Exchange (NYSE) futures contract, whose Friday settlement prices are collected beginning on May 6, 1982. The results show that, on average, intermarket spreads have been priced correctly from the beginning of trading in 1982 through early 1986. They were, however, significantly underpriced during the first portion of the period and overpriced since that time. Intramarket spreads since September 30, 1983, have been significantly overpriced. However, transaction costs would have absorbed any abnormal profits.