The purpose of this study is to compare various ways to construct index portfolio and examine the existing opportunity for index arbitrage between KOSPI200 futures market and cash market. Index arbitrage strategy using KOSPI200 futures and KOSPI200 index requires index-tracking portfolio. The key factor in building index portfolio is how to minimize tracking error as well as execution error at the same time. By sampling-optimization method, we were able to get fairly reasonable index-tracking portfolios of 10, 30 and 50 companies.
This paper analyzes transaction data of near-term futures contract and KOSPI200 index from November 1996 to October 1998 to obtain the actual bid-ask spread and compute arbitrage opportunity. In order to test arbitrage strategy, the daily prices of individual stocks adapted in KOSPI200 index are used. The result from this data test shows that the exchange members and institutional investors have arbitrage opportunities over 50% and 37% of transaction period, respectively. However, the frequency of arbitrage opportunities and average arbitrage profits are decreasing as time passes
