Journal of Investment Strategies

Risk.net

Does international stock index arbitrage exist?

Gunter Meissner, Olivia Ng and Pedro Villarreal

This study investigates international stock index arbitrage opportunities  between seven blue-chip  indexes in Asian, European and US time zones over a twenty-year time horizon. It finds that the associations between the indexes are strong enough to be exploited by traders. The success rates reach values of over 90%. Our numerical results show higher associations in down markets, confirming the contagion theory. We perform regression analyses and fit a vector autoregression (VAR) model, which confirms the results. In addition, we find strong correlation mean reversion, which may encourage pairs trading. We find no statistically significant evidence of a change in leadership or an increase in correlation over time.

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