Stock Market Efficiency under the Cost of Carry Model. Evidence from the Spanish Market
21 Pages Posted: 19 Aug 2016 Last revised: 25 Nov 2016
Date Written: August 16, 2016
This paper studies the conceptual framework of the calculation of the theoretical price of the future based on the cost of carry model and assesses the results of applying this model to the closing prices of the Spanish Market for 2007-2015. Whilst most of the research carried out into market efficiency and the arbitrage opportunities are focused on time series analysis with minute interval, this study analyses the efficiency at the end of the day. This information is particularly relevant to assess the efficacy of the hedging strategy in the daily accounting results of mutual and pension funds, insurance companies and other asset management portfolios. The results obtained suggest that the Spanish Stock Market can be considered efficient, since there are no significant differences between the market and the theoretical price of the future on IBEX 35. The effect of volatility in market efficiency has also been tested, with the result that the most volatile part of the sample presents an absolute percentage error which almost doubles that of the least volatile. Recent negative interest rate period has been separately analysed too in order to assess an eventual source of inefficiency: no significant impact has been observed in that respect.
Keywords: Cost of Carry, Stock Index Futures, IBEX 35, Stock Market Efficiency, Hedge, Asset Management, Negative Interest Rates
JEL Classification: A2, G1, G2
Suggested Citation: Suggested Citation