Discretionary Government Intervention and the Mispricing of Index Futures

Paul Draper*, Joseph K W FUNG

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

21 Citations (Scopus)


This article examines how and to what extent direct market intervention by the Hong Kong government in both the stock and futures markets affected the pricing relationship between the Hang Seng Index futures and the cash index during the period of the Asian financial crisis. The study avoids infrequent trading and nonexecution problems by using tradeable bid and offer quotes for the constituent stocks of the index. The results show that arbitrage efficiency was impeded during, and in the immediate aftermath of, the intervention. The findings suggest that discretionary government action introduces 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 short selling, as well as a lack of liquidity in the market.

Original languageEnglish
Pages (from-to)1159-1189
Number of pages31
JournalJournal of Futures Markets
Issue number12
Publication statusPublished - Dec 2003

Scopus Subject Areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance
  • Economics and Econometrics


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