Stochastic trends and cointegration in the market for equities
AbstractWe use a no-arbitrage, cost-of-carry pricing model to examine whether equity spot and futures markets are cointegrated. A stock index and its futures price should be cointegrated if the cost of carry is stationary. Otherwise, the appropriate cointegrating relationship is trivariate and includes the index, futures price, and cost of carry. We study the relationships among the Standard and Poor's 500 index, associated index futures price series, and interest rate for January 4, 1988, through June 30, 1995, and find that all three series are nonstationary. We further find that the index and futures price are not cointegrated unless the cost of carry is included in the cointegrating relationship. Our findings are consistent with the no-arbitrage pricing model and do not appear to be sensitive to the presence of structural breaks in the series.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 98-13.
Date of creation: 1998
Date of revision:
Other versions of this item:
- Ackert, Lucy F. & Racine, M. D., 1999. "Stochastic trends and cointegration in the market for equities," Journal of Economics and Business, Elsevier, vol. 51(2), pages 133-143, March.
- NEP-ALL-1998-12-09 (All new papers)
- NEP-CFN-1998-12-09 (Corporate Finance)
- NEP-ETS-1998-12-09 (Econometric Time Series)
- NEP-IFN-1998-12-09 (International Finance)
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