Valuation of Stock Index Futures and Their Relation to the Underlying Index: Theory and Evidence (Hedging)

Five hedging models representing a range of hedger motivation and attitudes to risk were applied to the three stock index futures. Both optimal hedge ratios and measures of effectiveness were calculated. It was found that the models worked well with stock index futures: the various criteria (utility maximization, variance minimization, basis arbitrage) were met using plausible optimal ratios. Both the exchange and the maturity of the contract used affected hedging behavior. Various pricing models were also applied to the futures: a simple cost of carry, a general equilibrium pricing model using systematic risk, and a forward-pricing model using compounded index value less a continuously compounded expected dividend component. The expected dividends were estimated using two time series models. It was found that the simple cost of carry was inadequate to explain price movements. The systematic risk of the contracts, as expected, approached the risk level of the market. The forward-pricing model resulted in prices which were slightly biased upward. Finally, the distributional characteristics and the independence of the contract prices were analyzed. All three of the futures were found to have slightly leptokurtic distributions. In addition, the New York contracts (NYSE index) were found to be negatively autocorrelated.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2014

Author dc:creator

• Junkus, Joan C.

• Economics, Finance

Identifier

(UMI)AAI8409787

OAI identifier oai:identifier

oai:www.ideals.illinois.edu:2142/71511