On the Relation between Liquidity and the Futures-Cash Basis: Evidence from a Natural Experiment

Jianlei Han, Zheyao Pan
2016 Social Science Research Network  
Cite this article as: Jianlei Han and Zheyao Pan, On the relation between liquidity and the futures-cash basis: evidence from a natural experiment, Journal of Financial Markets, http://dx. Abstract As a response to the 2015 Chinese stock market crash, regulators prohibited arbitrage activities in the index futures and cash markets. We use this natural experiment to test the hypothesis that liquidity and pricing efficiency causally affect each other. We find that resulting shift in the arbitrage
more » ... ft in the arbitrage boundary led to the breakdown of the two-way causality relation between liquidity and the absolute futures-cash basis. We thus confirm that the relation between liquidity and the absolute futures-cash basis is not driven by the omitted variable bias, but is indeed due to arbitrage. JEL classification: G01, G14, G18
doi:10.2139/ssrn.2771470 fatcat:zulcdp3corab5fi62vbcqox3cu