The Profitability and Arbitrage Efficiency of the Chicago Mercantile Exchange Nikkei 225 Futures

This article studies the profitability and arbitrage efficiency of the Chicago Mercantile Exchange (CME) Nikkei 225 futures. As one of the most typical quanto derivatives in the world, the CME Nikkei futures is traded in dollars while the underlying Nikkei index is traded in yen. The special characteristic involves more complicated uncertainties, which necessitate an investigation into its profitability and efficiency. To this end, we construct an arbitrage-free quanto pricing model to examine the mispricing of the CME Nikkei futures and the underlying spot prices for potential arbitrage opportunities. Distinguishing an ex-post trading rule from an ex-ante trading rule, we conduct non-parametric moving block bootstrap simulations to test the significance of profitability in the CME. The results show insignificant ex-post profitability but significant ex-ante profitability before and after the 2008 global financial crisis. Moreover, delayed execution significantly impacts the futures profitability. Profitable arbitrage opportunities are confirmed by implied transaction costs and explained by lagged absolute mispricing, lagged error, futures time to maturity, stock volatility, and trading volume in the CME. These findings have important implications for practitioners in their cross-border arbitrage trades, and for policy makers in their regulation of quantos in futures globalization.