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Price Expectation and the Pricing of Stock Index Futures

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  • Hsinan Hsu

    ()

  • Janchung Wang

    ()

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    Abstract

    Capital markets are not perfect or frictionless, and arbitrage mechanism cannot be complete, particularly for index arbitrage. This study constructs a theoretical foundation to explain why the price expectation of the underlying asset should be entered into the pricing formula of stock index futures. The price expectation and incompleteness of arbitrage then are taken into account to develop a pricing model of stock index futures in imperfect markets. This study also presents three approaches for estimating the model parameter. Finally, the concept of the degree of market imperfection is defined and the valuation model is provided.

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 23 (2004)
    Issue (Month): 2 (09)
    Pages: 167-184

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    Handle: RePEc:kap:rqfnac:v:23:y:2004:i:2:p:167-184

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. Inci, Ahmet Can & Lu, Biao, 2007. "Currency futures-spot basis and risk premium," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(2), pages 180-197, April.

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