Premium
Taxes and the Pricing of Stock Index Futures
Author(s) -
CORNELL BRADFORD,
FRENCH KENNETH R.
Publication year - 1983
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1983.tb02496.x
Subject(s) - futures contract , economics , arbitrage , stock index futures , financial economics , stock (firearms) , shareholder , stock market index , index (typography) , monetary economics , stock market , finance , mechanical engineering , paleontology , corporate governance , horse , engineering , biology , world wide web , computer science
Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no‐tax models predict.