PRICE DISCOVERY AND ARBITRAGE OPPORTUNITIES IN THE JAPANESE REIT FUTURES MARKET

Abstract

The price discovery role of stock index futures has been widely documented in the general finance literature. Comparatively, studies on the price discovery function of Real Estate Investment Trust (REIT) index futures are limited due to its short history. This research will focus on the Japanese REIT futures market. Firstly, this paper will investigate and compare the price discovery roles of REIT index futures and stock index futures, using the Tokyo Stock Exchange (TSE) REIT Index Futures and Tokyo Stock Price Index (TOPIX) Futures. Secondly, this study will explore the implementation of a cross-spread trading strategy to evaluate the profitability of arbitraging between REIT futures and stock futures. Both the Engle-Granger test and Johansen test exhibit a spot-to-futures lead for the REIT index market and a futures-to-spot lead for the stock index market. The lead-lag relationships in the Japanese market are in line with the existing literature. Although profitable arbitrage opportunities are present from 2011 to 2020, such opportunities are rare. The average profit margin for each executed trade and the annualised rate of return is estimated to be 4.98% and 50.56% respectively. Overall, this study will provide relevant information for investors who are keen to enter the Japanese REIT derivatives market, either to take advantage of the price deviation between REIT spot and REIT futures, or the mispricing between REIT futures and stock futures. Furthermore, the findings would also be useful in the formation of investors’ expectations of the recently developed REIT derivatives market in Singapore.