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Pricing stock index futures with stochastic interest rates

Pricing stock index futures with stochastic interest rates INTRODUCTION ne of the major financial innovations of the last decade was the introduction of trading in stock index futures. Within three years of their introduction in 1981, the dollar value of index futures trading exceeded the dollar value of traditional equity trading, and by October 1987, accounted for 150-200% of trading on the NYSE. This spectacular growth prompted many researchers to take a close look at the pricing relationship between the futures contracts and the underlying index. Because of the predominance of the S&P 500 futures contracts among the different index futures, most of the research has been directed at this contract. It is generally agreed that the linkage in prices between the S&P 500 index and the S&P 500 futures is maintained by arbitrage. If interest rates and dividend rates are nonstochastic, then, in the absence of taxes and other market imperfections, the no-arbitrage futures price at time t is given by: F(t,T) = S, exp[(r - S)(T - t ) ] (1) where: F ( t , T ) is the futures price; S , is the price of the index at time t ; r is the riskfree (nonstochastic) interest rate between t and http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

Pricing stock index futures with stochastic interest rates

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References (21)

Publisher
Wiley
Copyright
Copyright © 1991 Wiley Periodicals, Inc., A Wiley Company
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.3990110404
Publisher site
See Article on Publisher Site

Abstract

INTRODUCTION ne of the major financial innovations of the last decade was the introduction of trading in stock index futures. Within three years of their introduction in 1981, the dollar value of index futures trading exceeded the dollar value of traditional equity trading, and by October 1987, accounted for 150-200% of trading on the NYSE. This spectacular growth prompted many researchers to take a close look at the pricing relationship between the futures contracts and the underlying index. Because of the predominance of the S&P 500 futures contracts among the different index futures, most of the research has been directed at this contract. It is generally agreed that the linkage in prices between the S&P 500 index and the S&P 500 futures is maintained by arbitrage. If interest rates and dividend rates are nonstochastic, then, in the absence of taxes and other market imperfections, the no-arbitrage futures price at time t is given by: F(t,T) = S, exp[(r - S)(T - t ) ] (1) where: F ( t , T ) is the futures price; S , is the price of the index at time t ; r is the riskfree (nonstochastic) interest rate between t and

Journal

The Journal of Futures Markets – Wiley

Published: Aug 1, 1991

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