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Further Evidence on Mean Reversion in Index Basis Changes
Author(s) -
He Yan,
Wu Chunchi
Publication year - 2001
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2001.tb00006.x
Subject(s) - index (typography) , autocorrelation , basis (linear algebra) , mean reversion , econometrics , futures contract , cash , portfolio , basis point , statistics , economics , financial economics , mathematics , computer science , interest rate , monetary economics , finance , geometry , world wide web
We provide further evidence on the stochastic behavior of the futures minus cash index basis. In addition to infrequent trading, we identify index aggregation as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelation in basis changes. Our empirical results show that index price and basis changes often contain a moving average component. After the effects of infrequent trading and index aggregation are purged, we find that the autocorrelation of the adjusted index basis changes is significantly reduced.