DID BLACK MONDAY HAVE A PERMANENT EFFECT

Black Monday caused an immediate disruption between index futures and stock markets, but it is not clear whether it had any lasting effects. Hem we examine links between the markets that are sensitive to the li quidity shortages during Black Monday. By employing a tick-by-tick tra nsactions data set of S&P 500 index futures trades and S&P 500 equity index we calculate the spot/futures basis and basis risk, the spot/fut ures lead/lag relation, and the bid-ask spread. Evidence suggests that Black Monday had little continuing effect. On high-volatility days, h owever, index arbitrage becomes more costly as prices are more sensiti ve to future trades.