Market frictions limit arbitrage, but these frictions affect different stocks differently. Using intraday data on a liquid single stock futures and spot market, we examine the arbitrage efficiency of these two markets. We find evidence of significant cross- sectional variation in the size and asymmetricity of no-arbitrage bands. To the extent that market frictions affect all stocks similarly, commonality in the size of the bands is expected. 17% of variation in the size of the bands is explained by the first principal component. Changes in funding liquidity is a key factor that determines variation in the common component.

Citation: Limits to arbitrage: The case of single stock futures and spot prices, Nidhi Aggarwal. IGIDR Working Paper WP-2015-010, May 2015.