Arbitrage with holding costs: a utility-based approach

Article Abstract:

Unit time costs, or holding costs, are incurred in many arbitrage contexts. Examples include losing the use of short sale proceeds and lending funds at below market rates in reverse repurchase agreements. This paper analyzes the investment problem of a risk averse arbitrageur who faces holding costs. The model allows prices to deviate from "fundamental" values without allowing for riskless arbitrage opportunities. After characterizing an arbitrageur's optimal strategy, the model is examined in the context of the Treasury market. The analysis reveals that holding costs are an important friction in this market and that they can significantly affect arbitrageur behavior. (Reprinted by permission of the publisher.)

Methods, Analysis, Arbitrage, Treasury market

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A transactions data test of stock index futures market efficiency and index arbitrage profitability

Article Abstract:

This paper investigates the efficiency for stock index futures and the profitability of index arbitrage for The Chicago Board of Trade's Major Market Index contracts. The spot value of the index is computed with transactions prices for the component shares of the index obtained from the Fitch database. The tests account for transaction costs, execution lags, and the uptick rule for short sales of stocks. Results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time. (Reprinted by permission of the publisher.)

Security and commodity exchanges, Research, Statistics, Commodities, Stock index futures, Program trading (Securities), Board of Trade of the City of Chicago Inc.

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Some Empirical Tests of the Theory of Arbitrage Pricing

Article Abstract:

The Arbitrage Pricing Theory (APT) and CAPM's performance are compared. The APT performs well against the CAPM in explaining cross-sectional variation in asset returns. The estimated expected returns are determined by estimated factor loadings.

Testing, Economics

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