Mean reversion and basis dynamics

An analytical relationship between basis change autocorrelations and thin t rading effects together with partial adjustment factors is developed. Less than full price adjustments are demonstrated to lead to negative autocorrel ations in basis innovation series in addition to those induced by thin trad ing effects, Numerical and empirical analyses explore the interrelationship s between these effects and provide evidence for the presence of both effec ts in intradaily cash and futures data. (C) 2001 John Wiley & Sons, Inc.