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Forward and Futures Prices with Markovian Interest-Rate Processes

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  • Benninga, Simon
  • Protopapadakis, Aris

Abstract

The authors derive a closed-form expression for the differences between forward and futures prices in the framework of a Lucas equilibrium model. They calculate this difference for fixed income securities in two ways: using historic interest-rate data to calibrate the matrix of nominal state prices and testing a large sample of randomly generated state price matrices. In both cases, the authors find few meaningful differences between forward and futures prices. Larger differences are generated from highly diagonal state-price matrices. The authors conclude that in economically relevant circumstances the costs of marking to market for fixed income securities are negligible. Copyright 1994 by University of Chicago Press.

Suggested Citation

  • Benninga, Simon & Protopapadakis, Aris, 1994. "Forward and Futures Prices with Markovian Interest-Rate Processes," The Journal of Business, University of Chicago Press, vol. 67(3), pages 401-421, July.
    • Handle: RePEc:ucp:jnlbus:v:67:y:1994:i:3:p:401-21
    DOI: 10.1086/296639
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    Cited by:

    1. Lioui, Abraham, 1998. "Currency risk hedging: Futures vs. forward," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 61-81, January.
    2. Abraham Lioui & Patrice Poncet, 2000. "The Minimum Variance Hedge Ratio Under Stochastic Interest Rates," Management Science, INFORMS, vol. 46(5), pages 658-668, May.
    3. Richard Heaney, 1998. "A Test of the cost‐of‐carry relationship using the London Metal Exchange lead contract," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(2), pages 177-200, April.
    4. Wiener, Zvi & Benninga, Simon & Protopapadakis, Aris, 2000. "Limiting differences between forward and futures prices in a Lucas consumption model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(2), pages 151-161, June.
    5. Heaney, Richard, 2002. "Does knowledge of the cost of carry model improve commodity futures price forecasting ability?: A case study using the London Metal Exchange lead contract," International Journal of Forecasting, Elsevier, vol. 18(1), pages 45-65.

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