Examining the Strength of Comovement of Prices in Futures and Cash Markets: Evidence from India

The present study examines the arbitrage efficiency of the Indian equity market by using the daily closing prices of near month futures contracts and cash market. Substantial and sustained wave like mispricings in two markets have been observed, which provides exploitable arbitrage opportunities to the traders. However, due to mark-to-market these mispricings do not persist over long period. Moreover, it has been observed that are positively correlated with the time-tomaturity of the futures contracts, which suggests that strong arbitrage base is present in the market. Mean reverting behaviour of mispricings also suggest that early liquidation option may be more profitable than holding the positions until the expiry date.