General Equilibrium Stock Index Futures Prices: Theory and Empirical Evidence

Abstract We develop a closed-form general equilibrium model of stock index futures prices in a continuous-time economy with stochastic interest rates and market volatility. We show that futures prices implied by the model have very different properties from those of the cost of carry model. Using NYSE stock index futures data, we examine the restrictions imposed on futures prices by both the equilibrium and cost of carry models. Consistent with the equilibrium model, we find that stock index futures prices are related to market volatility and that their interest-rate sensitivity is a nonlinear function of contract maturity.

[1]  M. L. Hemler,et al.  The Quality Delivery Option in Treasury Bond Futures Contracts , 1990 .

[2]  Hans R. Stoll,et al.  The Dynamics of Stock Index and Stock Index Futures Returns , 1990, Journal of Financial and Quantitative Analysis.

[3]  Jack S. K. Chang,et al.  Forward and Futures Prices: Evidence from the Foreign Exchange Markets , 1990 .

[4]  F. Longstaff.  Temporal Aggregation and the Continuous-Time Capital Asset Pricing Model , 1989 .

[5]  Warren Bailey,et al.  The Pricing of Stock Index Options in a General Equilibrium Model , 1989, Journal of Financial and Quantitative Analysis.

[6]  Avraham Kamara,et al.  Market Trading Structures and Asset Pricing: Evidence from the Treasury-Bill Markets , 1988 .

[7]  A. Mackinlay,et al.  Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices , 1988 .

[8]  Paul D. Koch,et al.  The Temporal Price Relationship between S&P 500 Futures and the S&P 500 Index , 1987 .

[9]  K. French,et al.  Expected stock returns and volatility , 1987 .

[10]  S. Sundaresan,et al.  The Valuation of Options on Futures Contracts , 1985 .

[11]  S. Ross,et al.  AN INTERTEMPORAL GENERAL EQUILIBRIUM MODEL OF ASSET PRICES , 1985 .

[12]  S. Ross,et al.  A theory of the term structure of interest rates'', Econometrica 53, 385-407 , 1985 .

[13]  Douglas T. Breeden.  Futures Markets and Commodity Options: Hedging and Optimality in Incomplete Markets , 1984 .

[14]  K. French.  A comparison of futures and forward prices , 1983 .

[15]  K. French,et al.  Taxes and the Pricing of Stock Index Futures , 1983 .

[16]  M. Sundaresan,et al.  The relationship between spot and futures prices in stock index futures markets: Some preliminary evidence , 1983 .

[17]  S. Ross,et al.  The relation between forward prices and futures prices , 1981 .

[18]  Bradford Cornell,et al.  Forward and Futures Prices: Evidence from the Foreign Exchange Markets , 1981 .

[19]  S. Richard,et al.  A continuous time equilibrium model of forward prices and futures prices in a multigood economy , 1981 .

[20]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[21]  Richard J. Rendleman,et al.  The Efficiency of the Treasury Bill Futures Market , 1979 .

[22]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[23]  P. Cootner.  Returns to Speculators: Telser versus Keynes , 1960, Journal of Political Economy.

[24]  L. Telser.  Futures Trading and the Storage of Cotton and Wheat , 1958, Journal of Political Economy.

[25]  E. Fama,et al.  Commodity futures prices: some evidence on forecast power , 1987 .

[26]  K. French.  Detecting Spot Price Forecasts in Futures Prices , 1986 .

[27]  S. Karlin,et al.  A second course in stochastic processes , 1981 .

[28]  S. Ross,et al.  The valuation of options for alternative stochastic processes , 1976 .

[29]  F. Black.  The pricing of commodity contracts , 1976 .

[30]  A. Friedman.  Stochastic Differential Equations and Applications , 1975 .

[31]  R. C. Merton,et al.  Optimum Consumption and Portfolio Rules in a Continuous-Time Model* , 1975 .

[32]  J. Keynes.  A Treatise on Money , 1930 .