Relationship between share index volatility, basis and open interest in futures contracts : the South African experience

Motladiile, Bopelokgale (2003-04)

Study project (MBA)--University of Stellenbosch, 2003.

Thesis

ENGLISH ABSTRACT: In a rational efficiently functioning market, the price of the share index and share index futures contracts should be perfectly contemporaneously correlated. According to the cost of carry model, the futures price should equal its fair value at maturity. The basis should be equal to the cost of carry throughout the duration of the futures contract. However, in practice the cost of carry model is obscured and the basis varies and is normally not equal to the cost of carry. Reasons for this variability in basis include the mark-to-market requirement of the futures contract, the differential tax treatment of spot and futures contracts, as well as the transaction cost of entering into a contract. Transaction costs are lower for futures contracts than for spot contracts. This study uses the Chen, Cuny and Haugen (1995) model to examine the relationship between the basis and volatility of the underlying index and between the open interest of the futures contract and the volatility of the underlying index. Chen et al. (1995) predicted that the basis is negatively related to the volatility of the underlying index and that the open interest is positively related to the volatility of the underlying index. The study will also test the statement by Helmer and Longstaff (1991) that the basis has a negative concave relationship with the level of interest rate. The tests were performed on data from ALSI, FINI and INDI futures contracts. The sample period was from January 1998 to December 2001. The results correspond to those obtained by Chen et al. (1995) in that the basis is negatively related to the volatility of the underlying index. This is true for all the three indices. The other main prediction of the Chen, Cuny and Haugen (CCH) model (1995), which is also supported by the study, is that open interest is significantly related to the volatility of the underlying index. The study also supports the statement by Helmer and Longstaff (1991) that the there is a highly significant negative concave relationship between the basis and interest rate.

AFRIKAANSE OPSOMMING: In "n mark wat rasioneel funksioneer, behoort die prys van die aandele-indeks en aandele-indekstermynkontrakte perfek gekorreleer te wees in tyd. Volgens die drakostemodel behoort die termynkontrakprys op die vervaldatum gelyk te wees aan die billike waarde daarvan. Die basis behoort vir die looptyd van die termynkontrak gelyk te wees aan die drakoste. In die praktyk word die drakostemodel egter vertroebel en wissel die basis en is dit gewoonlik nie gelyk aan die drakoste nie. Redes vir hierdie veranderlikheid van die basis sluit in die waardasie teenoor markprys van die termynkontrak, die belasting van toepassing op loko- en termynkontrakte, asook die transaksiekoste by die aangaan van "n kontrak. transaksiekoste vir termynkontrakte is laer as vir lokokontrakte. Hierdie studie gebruik die model van Chen, Cuny en Haugen (1995) om die verwantskap tussen die basis en die volatiliteit van die onderliggende indeks en tussen die oop kontrakte van die termynkontrak en die volatiliteit van die onderliggende indeks te ondersoek. Chen et al. (1995) voer aan dat daar 'n negatiewe verwantskap is tussen die basis en die volatiliteit van die onderliggende indeks en dat daar "n positiewe verwantskap is tussen die oop rente en die volatiliteit van die onderliggende indeks. Die studie toets ook Helmer en Longstaff (1991) se hipotese dat daar 'n negatiewe, konkawe verhouding tussen die basis en die rentekoersvlak bestaan. Die toetse is uitgevoer op data van ALSI-, FINI- EN INDItermynkontrakte. Die steekproef was van Januarie 1998 tot Desember 2001. Die resultate stem ooreen met dié van Chen, Cuny en Haugen (1995) se model (CCH-model) in dié opsig dat daar "n negatiewe verband is tussen die basis en die volatiliteit van die onderliggende indeks. Dit geld vir al drie die indekse. Die ander hoofresultate van Chen et al. (1995), wat ook deur die studie ondersteun word, is dat daar "n beduidende verband tussen die oop kontrakte en die volatiliteit van die onderliggende indeks bestaan. Die studie ondersteun ook Helmer en Longstaff(1991) se siening dat daar 'n beduidende, negatiewe, konkawe verhouding tussen die basis en die rentekoers bestaan.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/53572
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