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An Alternative Formulation for the Pricing of Stock Index Futures: Theoretical and Empirical Perspectives


  • Chou-Wen Wang

    (Department of Risk Management & Insurance, National Kaohsiung First University of Science & Technology, Taiwan)

  • Ting-Yi Wu

    (National Kaohsiung First University of Science & Technology, Taiwan and Department of Business Administration, Kao Yuan University, Taiwan)


Assuming that a futures price is a function of the underlying asset and the basis, and that a Brownian bridge process drives the basis, this article provides the closed-form solution of futures with basis risk (FBR). The Brownian bridge process ensures that the basis is zero at the maturity of a futures contract. The FBR model is empirically tested with daily S&P500 futures data and is found to outperform both the Cornell and French (CF, 1983a) and Yan (2002) models. The overall mean errors in terms of index points and percentages are 0.1918 and -0.002% for the FBR model, compared to -1.8806 and -0.2088% for the CF model, and 2.5072 and 0.0973% for the Yan model.

Suggested Citation

  • Chou-Wen Wang & Ting-Yi Wu, 2007. "An Alternative Formulation for the Pricing of Stock Index Futures: Theoretical and Empirical Perspectives," International Journal of Business and Economics, College of Business and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 6(2), pages 121-134, August.
  • Handle: RePEc:ijb:journl:v:6:y:2007:i:2:p:121-134

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    References listed on IDEAS

    1. Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 1997. " Empirical Performance of Alternative Option Pricing Models," Journal of Finance, American Finance Association, vol. 52(5), pages 2003-2049, December.
    2. 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.
    3. Schwartz, Eduardo S, 1997. " The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    4. Xuemin Yan, 2002. "Valuation of commodity derivatives in a new multi-factor model," Review of Derivatives Research, Springer, vol. 5(3), pages 251-271, October.
    5. Gibson, Rajna & Schwartz, Eduardo S, 1990. " Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
    6. 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.
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    More about this item


    futures; basis risk; Brownian bridge;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing


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