Stock Index Futures Arbitrage Of Stock Analog Combination To Build The Research

Stock index futures was the most important and successful financial derivatives in the process of financial innovation in 1980s. It's a standardized futures contract based on an index of stock prices. According to the Cost of Carrying Pricing, the theoretical price of index futures should reflect the price of stock spot market, trading cost (such as the interest rate for capital borrowing), dividend gains and so on. Investors can get revenue by Cash and Carry Arbitrage or Reverse Cash and Carry Arbitrage, when the futures' price diverge from the no-arbitrage area which is taken from the above factors.While doing the futures-cash arbitrage, the operation in spot market doesn't mean to trading all the stocks which are included in the stock index. It just needs to construct and operate with a small group of stocks that could has the similar fluctuation as the stock index, that is the simulation group. The result whether the simulation group's fluctuation could reflect the fluctuation of the stock index is of great importance to the success of the futures-cash arbitrage.This paper will make an empirical analysis on the Shanghai and Shenzhen 300 Index by the method of weight-arrangement and industry-arrangement according to the construction principle of Shanghai and Shenzhen 300 Index, then we will make an adjustment and performance review for the simulation. The analysis shows the simulation group which has 50-60 stocks has the most similar fluctuation with the index. Based on the performance and cost of the group simulation, we regard the group of 50 stocks which is adjusted according to the earlier days' performance as the better one. According to the tracking error (TE), it has a great advantage compared with other groups.