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Price Expectation and the Pricing of Stock Index Futures: Evidence from Developed and Emerging Markets

Listed author(s):
  • Janchung Wang


    (Department of Financial Operations, National Kaohsiung First University of Science and Technology, Kaohsiung 824, Taiwan, ROC)

  • Hsinan Hsu


    (Department of Finance, Tainan University of Technology, Tainan, Taiwan, ROC)

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    This study examines how well the pricing model of Hsu and Wang (2004) explains the behavior of stock index futures prices for the developed markets (such as the S&P 500 index futures market) and the emerging markets (such as the Taiwan Futures Exchange (TAIFEX) Taiwan stock index futures market). It also compares the pricing performance of three alternative pricing models of stock index futures: the cost of carry model, the Hemler and Longstaff (1991) model, and the Hsu–Wang model. Overall, the Hsu–Wang model provides significantly better pricing performance than that of the cost of carry model in emerging markets with high degrees of imperfection. Moreover, this study also observes that the Hemler and Longstaff (1991) model performs better than the cost of carry model in estimating prices of the TAIFEX futures, suggesting that the incorporation of stochastic market volatility is beneficial to predict the TAIFEX futures prices.

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    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 09 (2006)
    Issue (Month): 04 ()
    Pages: 639-660

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    Handle: RePEc:wsi:rpbfmp:v:09:y:2006:i:04:p:639-660
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