The Implied Futures Financing Rate

We explore the cost of implicit leverage associated with an S&P 500 Index futures contract and derive an implied financing rate (the Futures-Implied Rate or FIR), based on a simple model of stock and futures, without any explicit arbitrage or other relationship to market interest rates. We develop new estimation methods for the FIR, including point and interval estimates, with important advantages over existing methods, and extend our methods to bivariate estimates of the FIR and equity volatility based on Wishart distributions. While our resulting FIR estimates were often attractive relative to market rates on explicit financings, the relationship between the implicit and explicit financing rates was volatile and varied considerably based on legal and economic regimes. Among our significant findings was the effectiveness of regulatory reform in reducing substantially the spreads between this FIR and contemporaneous LIBOR and US Treasury rates. Other findings include estimates of the convexity adjustment associated with the FIR, futures-based estimates of stock volatility and stock-rate correlation, and new test statistics for the significance of these estimates.