Testing the pricing and informational efficiency of the S&P 500 stock index futures market.

Abstract

Three empirical studies are conducted examining the efficiency of S&P 500 futures prices and the pricing of these futures contracts. In the first study, the ability of futures prices to predict the realized spot S&P 500 index prices on the expiration date is examined for near term contracts. The futures prices are found to be unbiased predictors of the realized spot index prices for the nineteen quarterly contracts from 1982 to 1986. Previous studies report significant deviations in S&P SOO futures prices from theoretically determined Cost of Carry Model (CCM) prices. In the second study, it is found that the CCM using the federal funds rate, a proxy for the overnight repurchase rate, provides relatively better estimates of the S&P S(x) futures prices over the 1984-1986 period. The futures mispricing also reflects the weekend effect anomaly: futures prices are "over-priced" relative to CCM prices on Mondays, whereas the opposite occurs on Fridays. The futures over-pricing (under-pricing) is characterized by "bull" ("bear") financial markets and the extent of price changes are relatively greater in the futures market. The futures under-pricing is supported by strong future market volume and open-interest positions. The basis and changes in it over the futures contract period are measures of how well integrated the futures market and the underlying spot market are. In the third study, based on daily closing prices for the S&P 500 index and index futures for the 1984-1986 period, it is found that the basis decreases over the contract period but the rate of decrease is independent of the time to expiration. The change in basis on Mondays is generally positive which also reflects the weekend effect anomaly. The daily basis is negative on 107 days, which generally occurs during strong futures market trading volume and open interest positions. It is doubtful whether the negative basis can be attributed to a negative net financing cost, where the dividend yield 0.1 the spot index exceeds the cost of financing the spot index forward.