Limiting differences between forward and futures prices in a Lucas consumption model

Zvi Wiener*, Simon Benninga, Aris Protopapadakis

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Benninga and Protopapadakis [Benninga, S., Protopapadakis, A., 1994. Forward and futures prices with Markovian interest rate processes. J. Bus. 67 401-421.] consider a Lucas asset pricing model and showed that the pricing of forward and futures contracts was expressible as a simple matrix function. In this paper we derive limiting conditions for these differences and relate them to the eigenvectors of the state price matrix. We show that except for a zero measure set of state price matrices, the differences are always small. We conclude that for a large class of interest rate futures contracts the forward price is a reasonable approximation to the futures price.

Original languageAmerican English
Pages (from-to)151-161
Number of pages11
JournalJournal of International Financial Markets, Institutions and Money
Volume10
Issue number2
DOIs
StatePublished - Jun 2000

Bibliographical note

Funding Information:
We acknowledge the financial assistance of the Krueger Center for Finance of the Hebrew University’s School of Business and Alon fellowship (Wiener). This paper was written while Wiener was a visiting fellow at the Wharton School of the University of Pennsylvania; it was revised while the authors were guests at the Innocenzo Gasparini Institute for Economic Research in Milan.

Keywords

  • F31
  • Forwards
  • Futures
  • G13
  • Term structure of interest rates

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