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Mean reversion in stock index futures markets: A nonlinear analysis
Author(s) -
Monoyios Michael,
Sarno Lucio
Publication year - 2002
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10008
Subject(s) - mean reversion , futures contract , stylized fact , basis (linear algebra) , stock index futures , econometrics , economics , nonlinear system , mathematics , stock market index , financial economics , physics , stock market , keynesian economics , paleontology , geometry , horse , quantum mechanics , biology
Several stylized theoretical models of futures basis behavior under nonzero transactions costs predictnonlinear mean reversion of the futures basis towards its equilibrium value. Nonlinearly mean‐revertingmodels are employed to characterize the basis of the S&P 500 and the FTSE 100 indices over thepost‐1987 crash period, capturing empirically these theoretical predictions and examining the view thatthe degree of mean reversion in the basis is a function of the size of the deviation from equilibrium. Theestimated half lives of basis shocks, obtained using Monte Carlo integration methods, suggest that for smallershocks to the basis level the basis displays substantial persistence, while for larger shocks the basis exhibitshighly nonlinear mean reversion towards its equilibrium value. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark22:285–314, 2002