Applications of Ensemble Empirical mode decomposition to stock-futures basis analysis

In rational, efficiently functioning markets, the returns on stock index and stock index futures contracts should be perfectly, contemporaneously correlated. But in the first two month, Chinese stock index futures contracts exhibited persistent departures from fair price, offering potentially profitable arbitrage opportunities. In this paper, we examine the stock-futures basis of CSI 300 recorded every 5 min over the period from April 16, 2010 to June 10, 2010 (1872 total data points). Ensemble Empirical mode decomposition (EEMD) is a time-frequency analysis method which has been developed and widely used for non-stationary and non-linear time series analysis. In the present study, we apply the EEMD to analyze the stock-futures basis series. As a result, we extract a monotonic decreasing trends from the series which implies the market becomes more and more efficient.