Analysis of different types of arbitrage

Abstract

This study starts by looking into the theoretical aspect of arbitrage, by providing a very good theoretical analysis of how this concept is both utilised and understood in financial mathematics and in the financial sector in general. The research continues looking at the different types of arbitrage in financial markets and then, eventually, searches for potential arbitrage opportunities in the UK market, as proxied by the large cap FTSE 100 and its futures index. In this thesis when checking for arbitrage strategies, by testing for the existence of the lead-lag relationship, this relationship resulted to be a bidirectional causality between the FTSE 100 Index and the FTSE 100 Futures Index. This implies that any new information is simultaneously incorporated in both the spot and futures indices. Hence, leading both indices to be contemporaneously correlated and so ruling out the existence of a lead-lag relationship, and the arbitrage opportunities that come with it, due to an efficient market.