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General Equilibrium Stock Index Futures Pricing Allowing for Event Risk

Author

Listed:
  • Simon H. Yen

    (Department of Finance, National Chengchi University, Taiwan)

  • Jai Jen Wang

    (Department of Finance, Feng Chia University, Taiwan)

Abstract

This study develops a new futures pricing model and derives its analytic solution. Comparative static and simulation results are also presented. Under this general equilibrium framework, we find that bounded degrees of state variables in the broad economy determine co-varying extents among various important market variables. However, increasing event risk, including the sizes of occurrence probability and corresponding impulse effects, makes their analysis intractable.

Suggested Citation

  • Simon H. Yen & Jai Jen Wang, 2007. "General Equilibrium Stock Index Futures Pricing Allowing for Event Risk," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 103-119, August.
  • Handle: RePEc:ijb:journl:v:6:y:2007:i:2:p:103-119
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    References listed on IDEAS

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    1. Kon, Stanley J, 1984. " Models of Stock Returns-A Comparison," Journal of Finance, American Finance Association, vol. 39(1), pages 147-165, March.
    2. Jun Liu & Francis A. Longstaff & Jun Pan, 2003. "Dynamic Asset Allocation with Event Risk," Journal of Finance, American Finance Association, vol. 58(1), pages 231-259, February.
    3. Epps, Thomas W & Epps, Mary Lee, 1976. "The Stochastic Dependence of Security Price Changes and Transaction Volumes: Implications for the Mixture-of-Distributions Hypothesis," Econometrica, Econometric Society, vol. 44(2), pages 305-321, March.
    4. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    5. Hemler, Michael L. & Longstaff, Francis A., 1991. "General Equilibrium Stock Index Futures Prices: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 287-308, September.
    6. Cox, John C. & Ross, Stephen A., 1976. "The valuation of options for alternative stochastic processes," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 145-166.
    7. Richard, Scott F. & Sundaresan, M., 1981. "A continuous time equilibrium model of forward prices and futures prices in a multigood economy," Journal of Financial Economics, Elsevier, vol. 9(4), pages 347-371, December.
    8. Johnson, Herb & Shanno, David, 1987. "Option Pricing when the Variance Is Changing," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(02), pages 143-151, June.
    9. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    10. Chang, Carolyn W. & S.K. Chang, Jack & Lim, Kian-Guan, 1998. "Information-time option pricing: theory and empirical evidence," Journal of Financial Economics, Elsevier, vol. 48(2), pages 211-242, May.
    11. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
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    More about this item

    Keywords

    general equilibrium model; event risk; intertemporal futures pricing;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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