Mean Reversion of Standard & Poor's 500 Index Basis Changes: Arbitrage‐induced or Statistical Illusion?

  • Author(s): MERTON H. MILLER, JAYARAM MUTHUSWAMY, ROBERT E. WHALEY
  • Published: Apr 30, 2012
  • Pages: 479-513
  • DOI: 10.1111/j.1540-6261.1994.tb05149.x

ABSTRACT

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. We propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. Our analysis suggests that spurious elements may creep in whenever the price‐change or return series of two securities or portfolios of securities are differenced.

Jump to menu

Main Navigation

Search the Site / Journal

Search Keywords

Search Tips

Members' Login

Credentials

Members' Options

Site Footer

View Mobile Version