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The degree of market imperfections has important implications for the behaviour of stock index futures. This work extends the evidence regarding the degree of market imperfections in three ways. First, this work represents the first attempt to compare the market imperfections of four Asian index futures markets. As anticipated, the degrees of market imperfections are significantly higher in the emerging markets (Korea and Taiwan) compared to the developed markets (Japan and Hong Kong). Second, this work compares the relative performance of three alternative volatility estimators in estimating the degree of market imperfections: the bivariate error correction GARCH(1,1) model, the exponentially weighted moving average (EWMA) and the power EWMA. The comparison results provide support for the conclusion that among the volatility estimators examined, the bivariate error correction GARCH(1,1) model performs the best. Third, this work tests the stationarity of the degrees of market imperfections. The empirical results demonstrate that the degrees of market imperfections for all four Asian markets are stationary, suggesting that the estimates of the degrees of imperfections obtained from ex post data are useful to investors on an ex ante basis.
