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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
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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.

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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

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