On the relation between liquidity and the futures-cash basis: evidence from a natural experiment

Jianlei Han, Zheyao Pan*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)115-131
Number of pages17
JournalJournal of Financial Markets
Volume36
DOIs
Publication statusPublished - 1 Nov 2017
Externally publishedYes

Keywords

  • futures-cash basis
  • liquidity
  • trading restrictions
  • arbitrage

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