Dislocations in World Index Futures

In this paper we study deviations from the standard textbook no-arbitrage relationship of 14 index futures from Asia, Europe, and North America between 2001 and 2012. We find strong empirical evidence that such deviations are pervasive across different countries that differ in terms of sophistication and location. By using both a principal component analysis and a dynamic factor model, we find that deviations are driven by a common factor. Our empirical analysis shows that this factor reflects U.S. and world market sentiment, hedging costs, and international capital flows. Furthermore, we perform a lead-lag analysis for Asia, Europe and North America, and find evidence of contagion in deviations from fair-value across different regions