Price Expectation and the Pricing of Stock Index Futures

Authors: Hsinan Hsu¹; Janchung Wang²

Source: Review of Quantitative Finance and Accounting, Volume 23, Number 2, September 2004 , pp. 167-184(18)

Publisher: Springer

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Abstract:

Capital markets are not perfect or frictionless, and arbitrage mechanism cannot be complete, particularly for index arbitrage. This study constructs a theoretical foundation to explain why the price expectation of the underlying asset should be entered into the pricing formula of stock index futures. The price expectation and incompleteness of arbitrage then are taken into account to develop a pricing model of stock index futures in imperfect markets. This study also presents three approaches for estimating the model parameter. Finally, the concept of the degree of market imperfection is defined and the valuation model is provided.

Keywords: price expectation; market imperfection; degree of market imperfection; implied method

Document Type: Research article

DOI: http://dx.doi.org/10.1023/B:REQU.0000039510.16484.21

Affiliations: 1: Professor, Department of Finance, Southern Taiwan University of Technology, Tainan, Taiwan, Republic of China., Email: hsinan@mail.stut.edu.tw 2: Associate Professor, Department of Financial Operations, National Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan, Republic of China., Email: janchung@ccms.nkfust.edu.tw

Publication date: 2004-09-01