Working Papers 2001 – Abstracts

Market Architecture and Nonlinear Dynamics of Australian Stock and Future Indices

Heather M. Anderson and Farshid Vahid

This paper studies the All Ordinaries Index in Australia, and its futures contract known as the Share Price Index. We use a new form of smooth transition model to account for a variety of nonlinearities caused by transaction costs and other market/data imperfections, and given the recent interest in the effects of market automation on price discovery, we focus on how the nonlinear properties of the basis and returns have changed, now that floor trading in futures contract has been replaced by electronic trading.

Keywords: Arbitrage, Electronic trading, Mean reversion, Nonlinear error correction, Smooth transition models, Thresholds, Transaction Costs.

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