Stock index futures mispricing: profit opportunities or risk premia?

This paper reports empirical evidence on stock index futures pricing based on about four years of synchronous hourly data from the UK. Reported index values are based on firm quotes. Identified arbitrage opportunities are therefore actually exploitable and economically significant. The analysis controls for cash market settlement procedures. The results show that ex-ante trading rules would have generated attractive profits after transaction costs and after the risks of dividend uncertainties, marking to market and possible delays in execution are considered. The far contract and the near contract tend to be mispriced in the same direction. The mild tendency of futures to be overpriced in rising markets and underpriced in falling markets appears to be unimportant. Finally, significant positive relationships are observed between the absolute magnitude of mispricing and time to maturity and between mispricing and index option implied volatility.