Footnote:
In: Journal of Financial Markets, Forthcoming
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments June 1, 2016 erstellt
Description:
We use a natural experiment in China to test the hypothesis that arbitrage is the underlying mechanism for the interplay between the stock market liquidity and the index futures-cash basis. Trading restrictions during and after the 2015 Chinese stock market crash prohibit the arbitrage activities, and allow us to test whether arbitrage causes the interaction between liquidity and basis. We find that during the restriction period, the significant two-way positive Granger causality relation between spreads and absolute basis disappears. We then show that our results are not confounded by the market crash effect. We also demonstrate that in the pre-restriction period, the relation between spreads and basis is stronger when the basis is positive and beyond the arbitrage cost. Overall, these results suggest that the relation between liquidity and basis is not driven by the 'omitted variable bias,' but is indeed due to the arbitrage force