Mispricing of index futures contracts and short sales constraints

Joseph K W FUNG*, Paul Draper

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

48 Citations (Scopus)

Abstract

This article examines if changes in short sales constraints affect the extent to which index futures contracts are mispriced. In particular, the study analyzes the mispricing of the Hong Kong Hang Seng Index futures contracts. Tests are conducted over three distinct regulatory regimes relating to the short selling of stocks in Hong Kong. This permits a study of how changes in short selling regulations affect the mispricing of futures contracts. The study indicates that relaxing the constraints on short selling reduces the extent of futures mispricing. Multiple regression analysis is used to test the relationship between the magnitude of mispricing and various economic factors including cash market volatility, time-to-maturity of the contract, trading cost, and dividend payout rates. The study also finds that lifting of the short selling restrictions speeds up market adjustment, especially when a long-hedge (long futures, short stock) signal is detected.

Original languageEnglish
Pages (from-to)695-715
Number of pages21
JournalJournal of Futures Markets
Volume19
Issue number6
DOIs
Publication statusPublished - 1999

Scopus Subject Areas

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

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