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Abstract

This paper examines the pricing behaviour of the Australian share price index futures contracts, incorporating taxes and transaction costs. The Australian SPI futures contract provides an interesting research setting to investigate futures pricing because of the combination of a relatively liquid futures market and a broadly based index portfolio with significant transaction costs, together with a tax system which differentiates between trades in the spot and the futures markets for at least one class of investors. The results presented are consistent with the existence of transaction costs as an explanation for the divergence between observed futures prices and predicted prices. The observed futures prices generally lay within the estimated transaction cost bounds.

Keywords

ARBITRAGE SPI FUTURES TRANSACTION COSTS

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