Index-futures arbitragers only enter into the market if the deviation from the arbitrage relation is sufficiently large to compensate for transaction costs and associated interest rate and dividend risks. We estimate the band around the theoretical futures price within which arbitrage is not...

Index-futures arbitrageurs enter into the market only if the deviation from the arbitrage relation is large enough to compensate for transaction costs and associated interest-rate and dividend risks. Using a threshold autoregression model for the mispricing error, we estimate the band around the...