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- Title
Decimalization, ETFs and futures pricing efficiency.
- Authors
Chen, Wei-Peng; Chou, Robin K.; Chung, Huimin
- Abstract
This study investigates the impact of decimalization (penny pricing) on the arbitrage relationship between index exchange-traded funds and E-mini index futures. The empirical results reveal that subsequent to penny pricing, there is a significant fall in the mean ex ante arbitrage profit, especially in the cases with higher transaction costs. Using the ordinary least squares and quantile regressions to control for the influences of changes in other market characteristics, it is found that the overall pricing efficiency has deteriorated in the post-decimalization period. These results are consistent with the hypothesis that, due to the lowered market depth and increased execution risks, the introduction of decimalization has in general resulted in weakening the ability and the willingness of arbitrageurs to initiate arbitrage trades, which subsequently leads to a reduction in the general efficiency of the cash/futures pricing system. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:157–178, 2009
- Subjects
ARBITRAGE; TRANSACTION costs; REFERENCE pricing; ASSET management; DECIMAL system; FINANCIAL markets; EXCHANGE traded funds; STOCK exchanges; LIQUIDITY (Economics)
- Publication
Journal of Futures Markets, 2009, Vol 29, Issue 2, p157
- ISSN
0270-7314
- Publication type
Article
- DOI
10.1002/fut.20357