The behavior of prices in the Value Line stock index futures market under both versions of the spot index.

摘要

Futures contracts on stock indices are subject to imperfect arbitrage-based pricing when the spot "good" is not an easily held portfolio. This dissertation explores the impact of index construction on success and failure in the stock index futures market. The Kansas City Value Line (KCVL) stock index futures market is interesting because the spot index was complex, and it underwent a change in definition from an equally-weighted geometric index to an equally-weighted arithmetic index to remain viable. Since the concept of stock index futures has been such a success and since the KCBT pioneered stock index futures trading, KCVL futures offers an unusual case study of failure in spite of it having had the leader's liquidity advantage to draw immediate speculative and hedging interest. Analysis of the efficiency of this market in pricing outright and calendar spread positions reveals that KCVL(Geometric) futures prices went through three distinct phases. In the first phase, like other index futures markets, it exhibited negative mispricing associated with disequilibrium due to "newness" of the market. In the second phase lasting four years the market incorrectly priced these geometric futures contracts like conventional arithmetic futures contracts, and induced "efficiency" from this incorrect perspective. This chronic mispricing was accompanied by very low hedging effectiveness. A dramatic correction of this anomaly took place in the third phase beginning in September 1986 coinciding with the publication of the Eytan-Harpaz model and the start of program trading. But by then KCVL(Geometric) futures had succumbed to its competition. The KCVL(Arithmetic) futures contract was introduced in March 1988. The market for these futures contracts operated efficiently without exhibiting unusual mispricing patterns. Past work has focussed on the critical interplay between hedgers and speculators in determining the viability of futures contracts. The statistical properties of the Value Line Index combined with the KCBT's advantage as the innovator in the market should have generated healthy speculative and hedging demand if the futures market had operated properly. In this case, the lack of, or flawed arbitrage activity played a critical role.