Price Behavior of Stock Index Futures: Evidence from the FTSE Xinhua China A50 and H-Share Index Futures Markets

Abstract

This study presents empirical evidence related to futures pricing for the SGX FTSE Xinhua China A50 and HKEx H-share index futures markets. First, whether the costof-carry model can describe the relationship between index futures prices and underlying stock indexes is examined. As anticipated, the cost of carry model cannot accurately predict the prices of these two index futures, because the two underlying Chinese stock markets display high price volatility. Furthermore, the empirical results indicate that different risk-free interest rate proxies have little effect on the mispricing of the cost-of-carry model. Next, this study compares the pricing performance of the cost-of-carry model and the Hemler-Longstaff (1991) model with stock market volatility. Empirical results demonstrate that incorporating stock market volatility into pricing models appears beneficial for estimating prices on these two index futures. Furthermore, the component GARCH model improves the pricing performance of the Hemler-Longstaff model. Finally, the autocorrelation and regression results suggest high persistence in mispricings.