An Empirical Study on the Nonlinear Dynam Relationship between Spot and Futures Pri

2002 ◽  
Vol 10 (1) ◽  
pp. 1-26
Author(s):  
In Joon Kim ◽  
Young Gyun Seo
Keyword(s):  
Stock Index ◽  
Empirical Literature ◽  
Stock Index Futures ◽  
Futures Prices ◽  
Index Futures ◽  
Dynamic Relationship ◽  
Nonlinear Equilibrium ◽  
Cost Of Carry ◽  
Using Data ◽  
Equilibrium Correction

This paper examines empirically the dynamic relationship between spot and futures prices in stock index futures market using data for the KOSPI200 during 1996 to 2001, and employing nonlinear-equilibrium-correction approach that essentially is based on the extension of Markovian regime shifts to nonstationary framework. A linear-VECM was rejected strongly when tested against a Markov-switching (MS) VECM that allowed for two regimes in the mean of equilibrium correction model, as well as in the variance-covariance matrix. The empirical model ultimately proposed therefore, is consistent with the spirit of Cost of Carry model, as well as with the increasingly growing empirical literature stressing the existence of important nonlinearities in both spot and futures prices movements.

Price Expectation and the Pricing of Stock Index Futures: Evidence from Developed and Emerging Markets

2006 ◽  
Vol 09 (04) ◽  
pp. 639-660 ◽  
Author(s):  
Janchung Wang ◽  
Hsinan Hsu
Keyword(s):  
Emerging Markets ◽  
Futures Market ◽  
Stock Index ◽  
Stock Index Futures ◽  
Futures Prices ◽  
Price Expectation ◽  
Index Futures ◽  
Cost Of Carry ◽  
The Cost ◽  
Better Than

This study examines how well the pricing model of Hsu and Wang (2004) explains the behavior of stock index futures prices for the developed markets (such as the S&P 500 index futures market) and the emerging markets (such as the Taiwan Futures Exchange (TAIFEX) Taiwan stock index futures market). It also compares the pricing performance of three alternative pricing models of stock index futures: the cost of carry model, the Hemler and Longstaff (1991) model, and the Hsu–Wang model. Overall, the Hsu–Wang model provides significantly better pricing performance than that of the cost of carry model in emerging markets with high degrees of imperfection. Moreover, this study also observes that the Hemler and Longstaff (1991) model performs better than the cost of carry model in estimating prices of the TAIFEX futures, suggesting that the incorporation of stochastic market volatility is beneficial to predict the TAIFEX futures prices.

Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices

1988 ◽  
Vol 1 (2) ◽  
pp. 137-158 ◽  
Author(s):  
A. Craig MacKinlay ◽  
Krishna Ramaswamy
Keyword(s):  
Stock Index ◽  
Stock Index Futures ◽  
Futures Prices ◽  
Index Futures

The emotional cost-of-carry: Chinese investor sentiment and equity index futures basis

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Song Cao ◽  
Ziran Li ◽  
Kees G. Koedijk ◽  
Xiang Gao
Keyword(s):  
Investor Sentiment ◽  
Stock Index ◽  
Stock Index Futures ◽  
Chinese Stock Market ◽  
Content Type ◽  
Index Futures ◽  
Market Participants ◽  
Cost Of Carry ◽  
The Cost ◽  
Equity Index

PurposeWhile the classic futures pricing tool works well for capital markets that are less affected by sentiment, it needs further modification in China's case as retail investors constitute a large portion of the Chinese stock market participants. Their expectations of the rate of return are prone to emotional swings. This paper, therefore, explores the role of investor sentiment in explaining futures basis changes via the channel of implied discount rates.Design/methodology/approachUsing Chinese equity market data from 2010 to 2019, the authors augment the cost-of-carry model for pricing stock index futures by incorporating the investor sentiment factor. This design allows us to estimate the basis in a better way that reflects the relationship between the underlying index price and its futures price.FindingsThe authors find strong evidence that the measure of Chinese investor sentiment drives the abnormal fluctuations in the basis of China's stock index futures. Moreover, this driving force turns out to be much less prominent for large-cap stocks, liquid contracting frequencies, regulatory loosening periods and mature markets, further verifying the sentiment argument for basis mispricing.Originality/valueThis study contributes to the literature by relying on investor sentiment measures to explain the persistent discount anomaly of index futures basis in China. This finding is of great importance for Chinese investors with the intention to implement arbitrage, hedging and speculation strategies.

Futures and Forward Prices - Theory and Hungarian Experience

2004 ◽  
Vol 54 (2) ◽  
pp. 159-174
Author(s):  
M. Radnai
Keyword(s):  
Stock Exchange ◽  
Relative Difference ◽  
Stock Index ◽  
Futures Contracts ◽  
Stock Index Futures ◽  
Futures Prices ◽  
Index Futures ◽  
Forward Prices ◽  
The Difference ◽  
Hungarian Experience

Researchers have examined the difference between forward and futures prices since the introduction of futures contracts. In this paper we derive the explicit formula for stock-index futures prices under the assumptions of lognormal asset prices, determine the relative difference between futures and forward prices, and test the model for BUX contracts traded on the Budapest Stock Exchange between 1997 and 2002.

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