Arbitrage Opportunities in the Futures Market : A Study of NSE Nifty Futures. (With Abstract)

This paper examines whether there is a violation of the spot-futures parity theorem in the case of NSE Nifty futures, and tries to find out the different factors behind such violation. The factors, which have been considered as the determinants of arbitrage profits, are the time to maturity; whether violation is more in rising markets or in declining markets; whether violation is more when theoretical futures price exceeds actual futures price or when actual futures price exceeds theoretical futures price; the number of contracts traded; and the change in open interest. The results indicate that there is a violation of the spot-futures parity relationship for many futures of the NSE Nifty. The results further indicate that arbitrage profits are more for far month futures contracts than for near month futures contracts; for undervalued futures market (relative to the spot market) than for overvalued futures market (relative to the spot market); for high liquid futures than for less liquid futures; and when new contracts are added than when outstanding contracts are settled. The results do not support higher or lower arbitrage profits in declining or in rising markets.