Analyzing the Arbitrage Opportunities and their Determinants in Deliverable Future Contracts: Evidence from Pakistan

  • Meriam Chuhdary Department of Business Administration, Virtual University of Pakistan
  • Aisha Ismail Department of Business Administration, Virtual University of Pakistan
Keywords: Arbitrage, Futures, Mispricing, Stock market, Cost of carry model, Tobit

Abstract

This study explores the arbitrage opportunities in Deliverable Future Contracts (DFC) due to mispricing and the factors affecting it. We use the cost of carry model to calculate the fair prices of futures. We use mispricing as a direct measure of arbitrage opportunities. With one-year daily data collected from the data portal of Pakistan Stock Exchange, we calculate mispricing for twenty-two stock futures. Summary statistics of mispricing confirm the presence of arbitrage opportunities in this market. We also examine the relationship of mispricing with the time to contract expiry, stock return volatility, the trading volume of ready and future market, and open interest. Tobit regression results indicate that apart from open interest, all other factors possess significant explanatory power for mispricing. 

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Published
2019-08-30
How to Cite
Chuhdary, M., & Ismail, A. (2019). Analyzing the Arbitrage Opportunities and their Determinants in Deliverable Future Contracts: Evidence from Pakistan. Journal of Finance and Accounting Research, 1(2). Retrieved from https://ojs.umt.edu.pk/index.php/jfar/article/view/93
Section
Articles