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Estimation of alternative pricing models for currency futures contracts

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  • Sequeira, John M.
  • McAleer, Michael
  • Chow, Ying-Foon

Abstract

The Risk Premium and Cost-of-Carry models regarding the pricing of Australian dollar futures contracts traded on the International Monetary Market of the Chicago Mercantile Exchange are estimated and compared. Cointegrating relationships among the Australian dollar spot and futures prices, and US and Australian risk-free rates of interest, suggest an error-correction representation for the Risk Premium model, and two alternative error-correction formulations for the Cost-of-Carry model. Two significant structural breaks in the futures price series permit estimation of appropriate models for the full sample in the presence of these breaks, for the full sample without explicitly modelling the breaks, and for various sub-samples created by these structural breaks. The Risk Premium and Cost-of-Carry formulations are estimated for all sample sets, the models obtained are found to be statistically adequate, and the qualitative results are reasonably robust across different sample sets for both models.

Suggested Citation

  • Sequeira, John M. & McAleer, Michael & Chow, Ying-Foon, 1999. "Estimation of alternative pricing models for currency futures contracts," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 48(4), pages 519-530.
    • Handle: RePEc:eee:matcom:v:48:y:1999:i:4:p:519-530
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    1. Stephen Wilcox & John Geppert, 2007. "An error-correction model for forecasting changes in foreign currency futures spreads," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 122-142, March.
    2. Abdul Hakim & Michael McAleer, 2009. "VaR Forecasts and Dynamic Conditional Correlations for Spot and Futures Returns on Stocks and Bonds," CIRJE F-Series CIRJE-F-676, CIRJE, Faculty of Economics, University of Tokyo.

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