General Equilibrium Stock Index Futures Prices: Theory and Empirical Evidence

Valuing futures and options on volatility

“…Now consider the valuation at time zero of a contingent claim with a payoff B(V r) at time T depending only on V r, the time-T value of V. Since V is not the price of a traded asset, we allow for the possibility that volatility risk is priced by the market. Consistent with Wiggins (1987), Stein and Stein (1991), and others, we make the assumption that the expected premium for volatility risk is proportional to the level of volatility, {V. We note that this assumption is similar to the implications of general equilibrium models such as Cox et al (1985), Hemler and Longstaff (1991), and Longstaff and Schwartz (1992), in which risk premia in security returns are proportional to the level of volatility. We also make the usual assumptions that markets for securities are perfect, frictionless, and are available for continuous trading.…”

A comparison of futures pricing models in a new market: The case of individual share futures

“…Other studies [e.g., Bailey (1989) and Figlewski (1984)] report that the mean of e t is negative. A further group of studies [e.g., Lim (1992), Twite (1991), and Stulz, Wasserfallen, 2 For example, the pricing of index futures has been examined in Australia by Bowers and Twite (1985), Heaney (1995), and Twite (1991); in Japan by Bailey (1989) and Lim (1992); in Switzerland by Stulz, Wasserfallen, and Stucki (1990); and in the U.S. by Bhatt and Cakici (1990), Cakici and Chatterjee (1991), Cornell and French (1983), Figlewski (1984), Hemler and Longstaff (1991), Klemkosky and Lee (1991), MacKinlay and Ramaswamy (1988), Modest and Sundaresan (1983), and Stoll and Whaley (1988), among others. 3 Note that the cost-of-carry model is actually a forward, not futures, pricing model.…”

“…The article compares three alternative pricing models. Previous tests of index futures pricing have tended to focus on the cost-of-carry model, with only a few studies [e.g., Bailey (1989), Cakici and Chatterjee (1991), and Hemler and Longstaff (1991)] comparing this model with an alternative. In this article three models are tested, including a modified cost-of-carry.…”

“…first, the Ramaswamy and Sundaresan (1985) model, has been applied by Bailey (1989) and Cakici and Chatterjee (1991), among others. 10 The other stochastic interest rate model is that of Hemler and Longstaff (1991). The empirical tests in the Hemler and Longstaff study indicate that their model is superior to the cost-of-carry model.…”

Short Sale and Index Futures Mispricing: Evidence from the Warsaw Stock Exchange

“…However, it is valid on the assumption that the market is frictionless. Previous studies on the subject have suggested other models that are adjusted to more realistic market conditions, for example, the models developed by Hsu and Wang (2004), Ramaswamy and Sundaresan, (1985), Hemler and Longstaff (1991). Nevertheless, the present paper employs the costof-carry model.…”