An empirical analysis of stock index futures

Bruce Michael Collins, Fordham University


Stock index futures contracts are to date the most important innovation in the financial futures market. The pricing of these contracts was examined using a variety of empirical methodologies addressing several theoretical issues. Prominent among the empirical tests includes market efficiency. The weak-form of market efficiency defined by Fama in a 1965 paper was tested using a time series model, estimating serial correlation coefficients, examining trading strategies for excess returns and estimating a linear pricing model using regression analysis. The results in all cases support the weak-form of market efficiency and clearly demonstrate that the stock index futures market has grown efficient over time. Another important area examined was the difference between forward and futures prices. The focus of studies in this area is two theoretical propositions developed by Cox, Ingersoll and Ross in a 1981 paper. First, three forward pricing models were used to predict forward prices and then compare with actual stock index futures prices. Statistically significant differences are found. According to the propositions mentioned above, the relationship between forward and futures prices is related to the covariance between percentage changes in futures prices and bond prices, the covariance between percentage changes in cash prices and bond prices, and the variance of bond prices. Results only partially supported the propositions. Nevertheless, the evidence is sufficient not to reject the propositions because there may be measurement error and inefficiencies in at least some of the futures prices. A further set of studies employ a testing methodology used by Neiderhoffer and Zeckhauser in a 1982 paper and a regression model to examine the value of stock index futures prices as an indicator of investor sentiment. Results provide strong support that futures prices contain information not reflected in the cash price and therefore are a valuable sentiment indicator. Several other short topics were examined including the impact of stock index futures on market volatility, tests of the distribution of stock index futures prices and a regression model which estimates the cost of carry valuation model.

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Recommended Citation

Collins, Bruce Michael, "An empirical analysis of stock index futures" (1988). ETD Collection for Fordham University. AAI8809463.