This paper contributes to the literature on modeling the behavior of the futures basis on several fronts. 2 Specifically, the paper investi- gates nonlinearities in basis adjustment toward its equilibrium value and proposes a novel approach to modeling the behavior of the basis inspired by the prediction of the theoretical arguments mentioned above. Using data for the S&P 500 and the FTSE 100 indices during the post-crash period since 1988, the authors provide strong evidence of nonlinear mean reversion in the futures basis for both indices consid- ered. The models indicate that the basis is closer to a unit root process the closer it is to its equilibrium value and becomes.
