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The Pricing of Australian Index Futures Contracts with Taxes and Transaction Costs

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  • Garry J. Twite

    (Australian Graduate School of Management, The University of New South Wales, Sydney NSW 2052, E†mail. gtwite@agsm.unsw edu au)

Abstract

This paper examines the pricing behaviour of the Australian share price index futures contracts, incorporating taxes and transaction costs. The Australian SPI futures contract provides an interesting research setting to investigate futures pricing because of the combination of a relatively liquid futures market and a broadly based index portfolio with significant transaction costs, together with a tax system which differentiates between trades in the spot and the futures markets for at least one class of investors. The results presented are consistent with the existence of transaction costs as an explanation for the divergence between observed futures prices and predicted prices. The observed futures prices generally lay within the estimated transaction cost bounds.

Suggested Citation

  • Garry J. Twite, 1998. "The Pricing of Australian Index Futures Contracts with Taxes and Transaction Costs," Australian Journal of Management, Australian School of Business, vol. 23(1), pages 57-81, June.
    • Handle: RePEc:sae:ausman:v:23:y:1998:i:1:p:57-81
    DOI: 10.1177/031289629802300104
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    References listed on IDEAS

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    1. Stoll, Hans R. & Whaley, Robert E., 1983. "Transaction costs and the small firm effect," Journal of Financial Economics, Elsevier, vol. 12(1), pages 57-79, June.
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    Cited by:

    1. Binh Huu Do & Robert W. Faff, 2004. "Do futures‐based strategies enhance dynamic portfolio insurance?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(6), pages 591-608, June.

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