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Discretionary government intervention and the mispricing of index futures
Author(s) -
Draper Paul,
Fung Joseph K. W.
Publication year - 2003
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.10107
Subject(s) - arbitrage , futures contract , index (typography) , market liquidity , economic interventionism , financial economics , economics , government (linguistics) , stock market index , futures market , stock market , monetary economics , business , politics , paleontology , linguistics , philosophy , horse , world wide web , computer science , law , political science , biology
This article examines how and to what extent direct market intervention by the Hong Kong government in both the stock and futures markets affectedthe pricing relationship between the Hang Seng Index futures and the cash index during the period of the Asian financial crisis. The study avoidsinfrequent trading and nonexecution problems by using tradeable bid and offer quotes for the constituent stocks of the index. The results show thatarbitrage efficiency was impeded during, and in the immediate aftermath of, the intervention. The findings suggest that discretionary government actionintroduces an additional risk factor for arbitrageurs that continues to disrupt normal market processes even after the government ceases to intervene.The continued disruption following the government's actions in the market also stems from a poorly developed stock loan market that impedes shortselling, as well as a lack of liquidity in the market. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1159–1189, 2003