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Price Expectation and the Pricing of Stock Index Futures: Evidence from Developed and Emerging Markets

Author

Listed:
  • Janchung Wang

    (Department of Financial Operations, National Kaohsiung First University of Science and Technology, Kaohsiung 824, Taiwan, ROC)

  • Hsinan Hsu

    (Department of Finance, Tainan University of Technology, Tainan, Taiwan, ROC)

Abstract

This study examines how well the pricing model of Hsu and Wang (2004) explains the behavior of stock index futures prices for the developed markets (such as the S&P 500 index futures market) and the emerging markets (such as the Taiwan Futures Exchange (TAIFEX) Taiwan stock index futures market). It also compares the pricing performance of three alternative pricing models of stock index futures: the cost of carry model, the Hemler and Longstaff (1991) model, and the Hsu–Wang model. Overall, the Hsu–Wang model provides significantly better pricing performance than that of the cost of carry model in emerging markets with high degrees of imperfection. Moreover, this study also observes that the Hemler and Longstaff (1991) model performs better than the cost of carry model in estimating prices of the TAIFEX futures, suggesting that the incorporation of stochastic market volatility is beneficial to predict the TAIFEX futures prices.

Suggested Citation

  • Janchung Wang & Hsinan Hsu, 2006. "Price Expectation and the Pricing of Stock Index Futures: Evidence from Developed and Emerging Markets," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 9(04), pages 639-660.
    • Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:04:n:s0219091506000884
    DOI: 10.1142/S0219091506000884
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    Citations

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    Cited by:

    1. Yang Gao & Bianxia Sun, 2018. "Impacts of Introducing Index Futures on Stock Market Volatilities: New Evidences from China," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-23, December.
    2. Hsinan Hsu & Hsing-Chi Wu & Hsien-Yi Lee & Janchung Wang, 2010. "A measurement of the extent of market imperfections between markets and applications," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2111-2126.

    More about this item

    Keywords

    Cost of carry model; Hemler–Longstaff model; Hsu–Wang model; price expectation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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