Persistent mispricing in a recently opened emerging index futures market: Arbitrageurs invited

Abstract

The purpose of this study is to analyze the persistent, typically negative, mispricing in the new stock index futures market in Turkey, which has amounted to 5-8%, several multiples of transaction costs. The observations suggest that it is the outcome of a combination of practical difficulties of shorting in the spot stock market, behavioral effects, and insufficient arbitrage. The magnitude of the mispricing and the absence of arbitrage make behavioral effects more visible and provide a unique opportunity to examine extant behavioral hypotheses. Results confirm effects such as disposition and/or conservatism with the mispricing negatively related to past returns, but unrelated to future returns. Finally, an orderly weakening of the negative relation to past returns and behavioral effects is observed, suggesting that such effects will diminish as the market matures.