Theoretical futures price

Theoretical futures price

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Based on the cost-of-carry theory, the theoretical futures price is equal to
Assuming spot price and theoretical futures price of emissions allowances follow geometric Brownian process, accordingly
Holder, Ma, and Mallett (HMM) utilize an iterative search procedure to simulate the average actual and implied theoretical futures price changes.
If the limit moves are caused by traders' short-term overreactions, then post-limit moves of the true theoretical futures price should occur within the limit range.
From Figure 2, the magnitude of the theoretical futures price changes for the sample of successive daily limit moves are clearly larger than that of the sample of single day limit moves.
As the magnitude of the difference between the theoretical futures prices and the actual futures prices is significantly larger for limit moves resulting in trading halts for the entire trading day, as compared to limit moves on trading days in which trading resumes, intraday trading halts and consecutive daily limit moves can also be predicted.
By comparing observed futures prices with theoretical futures prices (as determined by a cost-of-carry model), they find an S-shaped relationship in one grain market, indicating that price limits may stabilize prices as traders anticipate the potential effects of price limits.
Ackert and Hunter (1994) also compared observed futures prices with theoretical futures prices. Their model viewed the exchange as owning a call option against long positions and a put option against short positions (a straddle) to test the appropriateness of actual price limit levels, based on trading off the benefits of reduced margins with the costs associated with trading interruptions.
These theoretical futures prices, even though they are not observed, can be imputed even when a trading halt occurs.
In calculating the theoretical futures price, the treasury bill rate was used as a proxy for the risk-free rate of interest and actual dividend payments by firms represented in the MMI were used as a proxy for the expected dividends.
[F*.sub.tj,T] = the theoretical futures price on the [j.sup.th] minute on day t for a stock index having a cash settlement at T,
The theoretical futures mispricing is calculated as the difference between the actual and the theoretical futures price at time t.

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