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Price Expectation and the Pricing of Stock Index Futures

  • Hsinan Hsu

    ()

  • Janchung Wang

    ()

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    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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    File URL: http://journals.kluweronline.com/issn/0924-865X/contents
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    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
    Contact details of provider: Web page: http://springerlink.metapress.com/link.asp?id=102990

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