A COMPARISION OF HEMLER & LONGSTAFF MODEL AND HSU & WANG MODEL: THE CASE OF INDEX FUTURES
Journal: International Journal of Management (IJM) (Vol.6, No. 1)Publication Date: 2015-01-26
Authors : Manu K S;
Page : 724-732
Keywords : Futures pricing models; Hemler & Longstaff Model; Hsu & Wang Model; Pricing performance; Degree of Market Imperfection;
Abstract
The study investigates pricing performance of two alternative futures pricing models. The Hemler & Longstaff Model (HLM) and Hsu & Wang Model (HWM) (2004) for three futures indices of National Stock Exchange (NSE), India β CNX Nifty futures, Bank Nifty futures and CNX IT futures. The results shows that, the Hsu & Wang Model with an argument of real capital markets are imperfect and incomplete arbitrage mechanism provides much better pricing performance than the Hemler and Longstaff Model with stochastic interest rates and market volatility for all the three futures markets. CNX Nifty futures contract with highest trading history and trading volume has lowest pricing error than Bank Nifty futures and CNX IT futures Index for both the pricing models. This implies that degree of market imperfection has greater influence on reducing pricing errors of Indian futures markets than market volatility and stochastic interest rates. Therefore, investors should know the degree of market imperfection and average daily trading volume of the futures markets in which they would like to participate
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