Construction Of Stock Index Futures Arbitrage Portfolio

Index future ,one of the most important derivatives in the world ,will be traded in our market. It will supply new opportunities to institutional investors, which can arbitrage between spot and future market. But in the spot market they can not buy or sell index. Therefore it is important to make a spot portfolio which can trace the index. The better the portfolio traces the index, the less risk the arbitrage is!This paper discusses how to make a portfolio which can be used to arbitrage. In this paper we firstly discuss how to choose the stocks which is included in the index to make the portfolio. Then we discuss how to determine the weights which stocks have. We use four methods to make the portfolio, and use hu-shen300 index data to compute the tracking errors. We find that the max-weight method is best. Rest of the methods has litter more tracking error, but alph-beta cluster method and stepwise regression method can give new ways to choose stocks, which may reduce the bid-ask spread.