Index arbitrage and the pricing relationship between Australian stock index futures and their underlying shares

James Richard Cummings*, Alex Frino

*Corresponding author for this work

Research output: Contribution to journalArticle

12 Citations (Scopus)


This paper examines the mispricing of Australian stock index futures. Exogenous and endogenous price volatility is confirmed to have a positive impact on the mispricing spread, after filtering out predictable time series components. More accurate pricing associated with surprise trading volume in the underlying stocks is consistent with arbitrageurs acting to narrow price disparities relative to the futures market. Ex-ante interest rate volatility is the primary source of risk faced by arbitrageurs and fluctuations in the transaction cost of opening index arbitrage positions influence the extent to which they drive prices towards theoretical fair values.

Original languageEnglish
Pages (from-to)661-683
Number of pages23
JournalAccounting and Finance
Issue number3
Publication statusPublished - Sep 2011
Externally publishedYes


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