Volume : IV, Issue : IV, April - 2014

Arbitrage, Convergence, and Long Run Equilibrium between Futures and Spot Markets: A Cointegration Approach

Nivedita Mandal, Dr. A. K. Agarwal

Abstract :

 This paper studies the plausibility of cost of carry model in index futures and the convergence between futures and spot markets at maturity, which negates any opportunity for index arbitraging in long term. This paper investigates the long run relationship between futures and spot market by cointegration approach. The empirical analysis has been conducted for Bank Nifty Index futures and its underlying CNX Bank Index from June’2005 to December’2013. Unit root tests have been applied to check for the stationarity and the order of integration of two price series. A bivariate cointegration test reveals that the futures and spot prices are cointegrated, and thus it confirms convergence of the two price series, very low opportunity for arbitraging, and a stable long run equiliium relation between the futures and spot markets.

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Article: Download PDF   DOI : 10.36106/ijar  

Cite This Article:

"Nivedita Mandal, Dr.A.K.Agarwal Arbitrage, Convergence, and Long Run Equilibrium between Futures and Spot Markets: A Cointegration Approach Indian Journal of Applied Research, Vol.IV, Issue. IV

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