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A No‐Arbitrage Fractional Cointegration Model for Futures and Spot Daily Ranges
Author(s) -
Rossi Eduardo,
Santucci de Magistris Paolo
Publication year - 2013
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20556
Subject(s) - futures contract , cointegration , econometrics , economics , arbitrage , volatility (finance) , estimator , index arbitrage , long memory , forward volatility , error correction model , statistical arbitrage , implied volatility , financial economics , mathematics , statistics , risk arbitrage , arbitrage pricing theory , capital asset pricing model
The no‐arbitrage relation between futures and spot prices implies an analogous relation between futures and spot daily ranges. The long‐memory features of the range‐based volatility estimators are analyzed, and fractional cointegration is tested in a semi‐parametric framework. In particular, the no‐arbitrage condition is used to derive a long‐run relationship between volatility measures and to justify the use of a fractional vector error correction model (FVECM) to study their dynamic relationship. The out‐of‐sample forecasting superiority of FVECM, with respect to alternative models, is documented. The results highlight the importance of incorporating the long‐run equilibrium in volatilities to obtain better forecasts, given the information content in the volatility of futures prices. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 33:77–102, 2013