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Time to maturity in the basis of stock market indices: Evidence from the S&P 500 and the MMI

Authors
Journal
Journal of Empirical Finance
0927-5398
Publisher
Elsevier
Publication Date
Volume
5
Issue
3
Identifiers
DOI: 10.1016/s0927-5398(97)00017-0
Keywords
  • Basis
  • Stock Market Index
  • Intertemporal Risk
  • Nonsynchronous Trading
  • Time To Maturity
  • One-Step Ahead Forecasts
Disciplines
  • Economics

Abstract

Abstract This paper focuses on the behaviour of the basis in stock market index futures contracts over the lifetime of futures contracts. The model in this paper relaxes the cost of carry model assumptions of constant interest rate and known dividend yield over the lifetime of futures contracts. This allows for a test of the presence of time to maturity in the conditional variance of the model using GARCH. The empirical evidence reveals that, consistent with Samuelson's (1995) analysis, time to maturity is a determinant of the conditional variance of the basis. Furthermore, it implies that time to maturity cannot be accounted for by transaction costs or cost of carry.

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