Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price

ABSTRACT Deviations from the law of one price between futures and spot prices—the futures‐cash basis—capture information about liquidity demand for equity market exposure in global markets. We show that the basis comoves with dealer and investor futures positions, is contemporaneously positively cor...

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Bibliographic Details
Published in:The Journal of finance (New York) 2023-02, Vol.78 (1), p.301-345
Main Authors: HAZELKORN, TODD M., MOSKOWITZ, TOBIAS J., VASUDEVAN, KAUSHIK
Format: Article
Language:English
Subjects:
Basis
Futures trading
Liquidity
Markets
Prices
Securities markets
Supply & demand
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Summary:ABSTRACT Deviations from the law of one price between futures and spot prices—the futures‐cash basis—capture information about liquidity demand for equity market exposure in global markets. We show that the basis comoves with dealer and investor futures positions, is contemporaneously positively correlated with futures and spot market returns, and negatively predicts futures and spot returns. These findings are consistent with the futures‐cash basis reflecting liquidity demand that is common to futures and cash equity markets. We find persistent supply‐demand imbalances for equity index exposure reflected in the basis, giving rise to an annual premium of 5% to 6%.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.13198