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Nick Gunther, UC Berkeley: The Futures Financing Rate
November 28, 2017 @ 11:00 am
We estimate the financing rate implicit in equity index futures (“FIR”) by comparing the prices of the near and next contracts and adjusting for expected dividends and convexity. We provide a direct estimate of the FIR volatility, along with the correlation of the FIR and the underlying stock index, which are required for the convexity adjustment and the specification of confidence intervals. Our estimates do not rely on an assumption that the FIR is similar to interest rates observed in the market. Although the volatility levels of the FIR and of market interest rates were generally comparable over our observation period, their relationship was unstable.
An empirical study over the nearly eighteen years from 1996 to August, 2013 of the spread between the FIR associated with S&P 500 futures and market interest rates was consistent with four distinct regimes, determined by the passage of major derivatives legislation in 2000, and the periods during and after the financial crisis.