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Article Dans Une Revue European Journal of Operational Research Année : 2022

Is normal backwardation normal? Valuing financial futures with a local index-rate covariance

Résumé

Revisiting the two-factor valuation of futures contracts, we propose a new pricing model for financial futures and their derivatives. The linkage between the money market funding rate and the underlying asset price is stochastic and state-dependent, in compliance with investors’ arbitrage strategies. The model explicitly captures the impact of interest rate expectations in the marking-to-market feature of futures, as predicted by Cox, Ingersoll, and Ross (1981) theory. The backwardation vs. contango regime of financial futures depends on a new parameter, the contango factor, which paves the way for future empirical studies. Akin to the implied volatility of option contracts, the contango factor provides market participants with a universal gauge of futures contracts’ level of contango, consistent across futures markets and maturities. Our numerical simulations show significant deviations from the traditional cost-of-carry model of futures prices, with price deviations above 1% even for short-term futures contracts.
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Dates et versions

hal-04011013 , version 1 (08-01-2024)

Licence

Paternité - Pas d'utilisation commerciale

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Philippe Raimbourg, Paul Zimmermann. Is normal backwardation normal? Valuing financial futures with a local index-rate covariance. European Journal of Operational Research, 2022, 298 (1), pp.351-367. ⟨10.1016/j.ejor.2021.06.051⟩. ⟨hal-04011013⟩
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