An analysis and modeling of the informational content, premium, and pricing of stock index futures

Recent introduction of new securities, such as the stock index futures and options on futures, have created many unexplored issues. In order to gain some new insights on these markets, this research addresses the following controversial and unresolved issues: A) What is the relationship between the spot stock index price and the futures price, and how the latter should be derermined? B) Does the stock index futures price convey any information regarding the future spot price? C) Is there a risk premium component within the stock index futures price? A summary of the contributions and findings of our research is as follows: 1. An extension of the concept of carrying charges, especially the convenience yield, to financial futures. 2. Using arbitrage and dominance principles, while employing a new procedure to create hedged portfolios, an equilibrium model for the Stock Index Futures contracts is developed. The model not only differentiates between cash and stock dividends, but also incorporates the non-dividend distributions (e. g.; rights, warrants) on the stocks. It further accounts for various explicit transaction costs and the differential borrowing and lending rates. It is shown that all of the pricing models already derived by others, are special cases of the generalized model developed here. Moreover, the research delineates the differences in the futures prices under perfect, semiperfect, and imperfect market settings. It is shown that, contrary to common assumptions, these prices will generally nor equal each other. 3. Most academicians have argued that futures prices do not convey any additional information, relarive to the current spot prices, regarding the maturity (future) spot price. Here, we have advanced a set of theoretical arguments leading to a contrary hypothesis. 4. Using a superior econometric methodology, the hypotheses of informational content and risk premium factors within the stock index futures price have empirically been tested. 5. The analyses and statistical tests support both of the above hypotheses. These new findings are contrary to most previously published results. Some significant statistical reasons for the inconclusiveness of other research findings on related topics are presented.