Discretionary Government Intervention and the Mispricing of Index Futures

Paul Draper*, Joseph K W FUNG

*Corresponding author for this work

    Research output: Contribution to journalJournal articlepeer-review

    26 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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