INTRADAY RELATIONSHIPS AMONG INDEX ARBITRAGE, SPOT AND FUTURES PRICE VOLATILITY, AND SPOT MARKET VOLUME - A TRANSACTIONS DATA TEST

This paper examines intraday temporal relationships among arbitrage spreads, cash and futures price volatility, and cash trading volume, using transactions data for the Major Market Index futures contracts and the component stocks of the index. Results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume. The impact of the spread, however, is attenuated by the short-sale restriction in the cash market. Contrary to popular beliefs, a more volatile market leads to subsequent decreases in the spread, probably because of increases in the supply of arbitrage services or faster price adjustments.