The effect of the introduction of Cubes on the Nasdaq‐100 index spot‐futures pricing relationship

Alexander Kurov · Dennis J. Lasser

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Market Dynamics and Volatility

Abstract

Abstract This paper examines the impact of the introduction of the Nasdaq‐100 Index Tracking Stock (referred to as Cubes) on the pricing relationship between Nasdaq‐100 futures and the underlying index. Observations obtained from tick‐by‐tick Nasdaq‐100 futures transactions and index value data support the hypothesis that the introduction of Cubes in March 1999 has led to improvements in the Nasdaq‐100 index futures pricing efficiency. Both the size and frequency of violations in futures price boundaries appear to be reduced. Furthermore, there appears to be an increase in the speed of the market response to observed violations. These results are attributed to the increased ease in establishing a spot Nasdaq‐100 index position after the introduction of the tracking stock. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 197–218, 2002

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References

1992Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances 1987The Relation Between Price Changes and Trading Volume: A Survey 1994Transactions, Volume, and Volatility 1992A Further Analysis of the Lead–Lag Relationship Between the Cash Market and Stock Index Futures Market 1995Cointegration, Error Correction, and Price Discovery on Informationally Linked Security Markets 1984Hedging Performance and Basis Risk in Stock Index Futures 1988Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices 1994Mean Reversion of Standard & Poor's 500 Index Basis Changes: Arbitrage‐induced or Statistical Illusion?

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