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Degree of market imperfection and the pricing of stock index futures

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  • Janchung Wang
  • Hsinan Hsu

Abstract

Capital markets are imperfect. Market imperfections differ among markets. This study uses a theoretical valuation model derived by Hsu and Wang (2004) to estimate the degrees of market imperfection for mature and immature markets, and tests the applicability of the model. Moreover, this study proposes some theoretical hypotheses and empirical tests regarding the relationship between the degree of market imperfection and futures pricing. The evidence indicates that the Hsu and Wang (2004) model appears to provide a reasonable measure of the degree of market imperfection for real capital markets. The theoretical hypotheses and empirical results indicate that larger market imperfections are relatively more mispriced based on the model of perfect-market assumption, suggesting that the impact of market imperfection on the pricing of stock index futures is enormous, and cannot be neglected. Thus, when investors more closely examine the applicability of the cost of carry model for pricing mature and immature futures markets, they should note the degree of imperfection for the markets in which they are participating.

Suggested Citation

  • Janchung Wang & Hsinan Hsu, 2006. "Degree of market imperfection and the pricing of stock index futures," Applied Financial Economics, Taylor & Francis Journals, vol. 16(3), pages 245-258.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:3:p:245-258
    DOI: 10.1080/09603100500386768
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    Cited by:

    1. Lin, Xiaoqiang & Chen, Qiang & Tang, Zhenpeng, 2014. "Dynamic hedging strategy in incomplete market: Evidence from Shanghai fuel oil futures market," Economic Modelling, Elsevier, vol. 40(C), pages 81-90.
    2. Zhang, Hailiang & Sattar, Muhammad Atif & Wang, Haijun, 2024. "Uncertainty measure: As a proxy for the degree of market imperfection," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 159-171.
    3. Janchung Wang, 2008. "Degree of market imperfections: evidence from four Asian index futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 18(15), pages 1233-1246.
    4. Maisondieu-Laforge, Olivier, 2007. "Informed trading and the consistent enforcement hypothesis: Evidence from bid-ask spreads in France and Britain," Global Finance Journal, Elsevier, vol. 17(3), pages 439-453, March.
    5. Hsinan Hsu & Yaw-Bin Wang, 2009. "Feasibility of riskless hedged portfolios in imperfect markets," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1149-1153.

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