Hostname: page-component-7479d7b7d-k7p5g Total loading time: 0 Render date: 2024-07-11T05:42:37.788Z Has data issue: false hasContentIssue false
  • English
  • Français

General Equilibrium Stock Index Futures Prices: Theory and Empirical Evidence

Published online by Cambridge University Press:  06 April 2009

Michael L. Hemler  and
Francis A. Longstaff
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 3 , September 1991 , pp. 287 - 308
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bailey, W., and Stulz, R.. “The Pricing of Stock Index Options in a General Equilibrium Model.” Journal of Financial and Quantitative Analysis, 24 (03 1989), 1–12.CrossRefGoogle Scholar
Black, F. “The Pricing of Commodity Contracts.” Journal of Financial Economics, 3 (01–03 1976), 167–179.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (05–06 1973), 637–659.CrossRefGoogle Scholar
Breeden, D. T. “Futures Markets and Commodity Options: Hedging and Optimally in Incomplete Markets.” Journal of Economic Theory, 32 (04 1984), 275–300.CrossRefGoogle Scholar
Cootner, P. H. “Returns to Speculators: Telser vs. Keynes.” Journal of Political Economy, 68 (08 1960), 396–404.CrossRefGoogle Scholar
Cornell, B., and French, K.. “Taxes and the Pricing of Stock Index Futures.” Journal of Finance, 38 (06 1983), 675–694.CrossRefGoogle Scholar
Cornell, B., and Reinganum, M.. “Forward and Futures Prices: Evidence from the Foreign Exchange Market.” Journal of Finance, 36 (12, 1981), 1035–1045.CrossRefGoogle Scholar
Cox, J. C; Ingersoll, J. E. Jr; and Ross, S. A.. “The Relation between Forward Prices and Futures Prices.” Journal of Financial Economics, 9 (12 1981), 321–346.CrossRefGoogle Scholar
Cox, J. C; Ingersoll, J. E. Jr; and Ross, S. A.. “An Intertemporal General Equilibrium Model of Asset Prices.” Econometrica, 53 (03 1985a), 363–384.CrossRefGoogle Scholar
Cox, J. C; Ingersoll, J. E. Jr; and Ross, S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (03 1985b), 385–407.CrossRefGoogle Scholar
Cox, J. C, and Ross, S. A.. “The Valuation of Options for Alternative Stochastic Processes.” Journal of Financial Economics, 3 (01–03 1976), 145–166.CrossRefGoogle Scholar
Fama, E. E, and French, K. R.. “Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage.” Journal of Business, 60 (01 1987), 53–73.Google Scholar
French, K. R. “A Comparison of Futures and Forward Prices.” Journal of Financial Economics, 12 (11 1983), 311–342.CrossRefGoogle Scholar
French, K. R.; Schwert, G. W.; and Stambaugh, R. F.. “Expected Stock Returns and Volatility.” Journal of Financial Economics, 19 (09 1987), 3–29.CrossRefGoogle Scholar
Friedman, A.Stochastic Differential Equations and Applications, Vol. 1. New York: Academic Press (1975).Google Scholar
Hemler, M. L. “The Quality Delivery Option in Treasury Bond Futures Contracts.” Ph.D. Diss., Graduate School of Business, Univ. of Chicago (1988).Google Scholar
Hemler, M. L., and Longstaff, F. A.. “Expected Stock Returns and Stock Index Futures Prices.” Working Paper, Fuqua School of Business, Duke Univ. (1990).Google Scholar
Jarrow, R., and Oldfield, G.. “Forward Contracts and Futures Contracts.” Journal of Financial Economics, 9 (12 1981), 373–382.CrossRefGoogle Scholar
Kamara, A. “Market Trading Structures and Asset Pricing: Evidence from the Treasury-Bill Markets.” Review of Financial Studies, 1 (Winter 1988), 357–376.CrossRefGoogle Scholar
Karlin, S., and Taylor, H. M.. A Second Course in Stochastic Processes. New York: Academic Press (1981).Google Scholar
Kawaller, I. G.; Koch, P. D.; and Koch, T. W.. “The Temporal Relationship between S&P 500 Futures and the S&P 500 Index.” Journal of Finance, 42 (12 1987), 1309–1329.CrossRefGoogle Scholar
Keynes, J. M.A Treatise on Money, Vol. II. New York: Harcourt Brace (1930).Google Scholar
Longstaff, F. A. “Temporal Aggregation and the Continuous Time Capital Asset Pricing Model.” Journal of Finance, 44 (09 1989), 871–887.Google Scholar
MacKinley, A. C., and Ramaswamy, K.. “Index-Futures Arbitrage and the Behavior of Stock Index Futures Prices.” Review of Financial Studies, 1 (Summer 1988), 137–158.CrossRefGoogle Scholar
Maddala, G. S.Econometrics. New York: McGraw-Hill (1977).Google Scholar
Merton, R. C. “Optimum Consumption and Portfolio Rules in a Continuous Time Model.” Journal of Economic Theory, 3 (12 1971), 373–113.CrossRefGoogle Scholar
Modest, D., and Sundaresan, M.. “The Relationship between Spot and Futures Prices in Stock Index Futures Markets: Some Preliminary Evidence.” Journal of Futures Markets, 3 (Spring 1983), 15–41.CrossRefGoogle Scholar
Ng, N. “Detecting Spot Price Forecasts in Futures Prices Using Causality Tests.” Review of Futures Markets, 6 (No. 2, 1987), 250–267.Google Scholar
Ramaswamy, K., and Sundaresan, S.. “The Valuation of Options on Futures Contracts.” Journal of Finance, 40 (12 1985), 1319–1340.CrossRefGoogle Scholar
Rendleman, R. Jr, and Carabini, C.. “The Efficiency of the Treasury Bill Futures Market.” Journal of Finance, 34 (09 1979), 895–914.CrossRefGoogle Scholar
Resnick, B., and Hennigar, E.. “The Relationship between Futures and Cash Prices for U.S. Treasury Bonds.” Review of Research in Futures Markets, 2 (No. 3, 1983), 282–299.Google Scholar
Richard, S. E, and Sundaresan, M.. “A Continuous Time Equilibrium Model of Forward Prices and Futures Prices in a Multi-good Economy.” Journal of Financial Economics, 9 (12 1981), 347–371.CrossRefGoogle Scholar
Samuelson, P. A. “Proof that Properly Anticipated Prices Fluctuate Randomly.” Industrial Management Review, 6 (Spring 1965), 41–49.Google Scholar
Stoll, H. R., and Whaley, R. E.. “The Dynamics of Stock Index and Stock Index Futures Returns.” Journal of Financial and Quantitative Analysis, 25 (12 1990), 441–468.CrossRefGoogle Scholar
Telser, L. G. “Futures Trading and the Storage of Cotton and Wheat.” Journal of Political Economy, 66 (06 1958), 233–255.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (05 1980), 817–838.CrossRefGoogle Scholar
Working, H. “Theory of the Inverse Carrying Charge in Futures Markets.” Journal of Farm Economics, 30 (02 1948), 1–28.CrossRefGoogle Scholar