Mispricing, Volume, Volatility and Open Interest

Interdependence of the mispricing, volatility, volume and open interest of stock futures and the volatility and volume of their underlying shares is examined in a vector autoregressive framework. There is evidence of significant mispricing that persists for one day but is not explained by other variables. An increase in the volatility of futures is generally followed by an increase in the volatility of the underlying. The volatility and volume of futures and the underlying exhibit alter–nating increase/decrease cycles with up to five–day lags. These properties can be very useful in forecasting the mispricing and the volatility, volume and open interest for futures and their underlying shares. Futures mispricing does not change financial activities in any predictable manner.