Decimalization, ETFs and futures pricing efficiency

Wei Peng Chen, Robin K. Chou, Hui-Min Chung

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

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.

Original languageAmerican English
Pages (from-to)157-178
Number of pages22
JournalJournal of Futures Markets
Volume29
Issue number2
DOIs
StatePublished - 1 Feb 2009

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