Stock Index Arbitrage and Stock Price Volatility in the Athens Derivatives Exchange

Summary

This article presents the major parameters of the FTSE/ASE-20 index futures contracts which are the most actively traded in the Athens Derivatives Exchange (ADEX). In particular, data from the FTSE/ASE-20 futures and the FTSE/ASE-20 index were used in the article to examine the timing, the profitability and the risk of index arbitrage transactions. The data set includes the closing prices of the index and the settlement prices of the futures. The sample period is from April 15, 1999 to May 19, 2000. The results indicate that there were about 16 index arbitrage opportunities for all contracts. In each case, the arbitrageur had to put in practice a specific suggested strategy in order to take advantage of the opportunity. Finally, the paper discusses the postulate that stock prices have been more volatile since stock index futures contracts began trading (August 27, 1999). In fact, at monthly, weekly, daily and intra-day frequencies, volatility appears to have declined after August 1999. Furthermore, price volatility is no higher on days when future contracts are settled than on other days.