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Short-selling restrictions, strategic stock holdings and index futures markets in Finland

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  • Hietala, Pekka
  • Jokivuolle, Esa
  • Koskinen, Yrjö

Abstract

The goal of the paper is to rationalize the observed persistent underpricing in the Finnish stock index futures market.It is shown that under a binding short-selling restriction on stocks the observed futures "underpricing" can be a result of strategic motives of the Finnish industrial and financial groups to hold large amounts of stocks, which implies a net futures demand for hedging part of the financial risk brought in by these strategic holdings."Underpricing" can also emerge under short-selling restrictions, if strategic investors are better informed than other traders.Two main empirical implications of the model - a negative relationship between the futures basis and stock index volatility and a positive relationship between the basis and private information signals received by informed investors - are supported by the Finnish data from May 1988 to December 1990.

Suggested Citation

  • Hietala, Pekka & Jokivuolle, Esa & Koskinen, Yrjö, 1994. "Short-selling restrictions, strategic stock holdings and index futures markets in Finland," Bank of Finland Research Discussion Papers 19/1994, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp1994_019
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