The Implied Futures Financing Rate

49 Pages Posted: 15 Mar 2021

See all articles by Nicholas Gunther

Nicholas Gunther

University of California, Berkeley

Robert Anderson

University of California, Berkeley

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Alex Papanicolaou

University of California, Berkeley

Date Written: February 20, 2021

Abstract

We explore the cost of implicit leverage associated with an S&P 500 Index futures contract and derive an implied financing rate (the Futures-Implied Rate or FIR), based on a simple model of stock and futures, without any explicit arbitrage or other relationship to market interest rates. We develop new estimation methods for the FIR, including point and interval estimates, with important advantages over existing methods, and extend our methods to bivariate estimates of the FIR and equity volatility based on Wishart distributions. While our resulting FIR estimates were often attractive relative to market rates on explicit financings, the relationship between the implicit and explicit financing rates was volatile and varied considerably based on legal and economic regimes. Among our significant findings was the effectiveness of regulatory reform in reducing substantially the spreads between this FIR and contemporaneous LIBOR and US Treasury rates. Other findings include estimates of the convexity adjustment associated with the FIR, futures-based estimates of stock volatility and stock-rate correlation, and new test statistics for the significance of these estimates.

Keywords: futures, financing, debt, rate, leverage, trading, stock, equity index, S&P 500, Wishart, estimation, point estimate, interval estimate, fiducial inference, LIBOR, Treasury, rates, time series, AR(1), Ornstein-Uhlenbeck, autoregressive

JEL Classification: C01, C02, C12, C13, C19, C22, C29, C32, C39, C51, C58, C59, C61, C65, C69, G12, G13 ,G18

Suggested Citation

Gunther, Nicholas and Anderson, Robert and Goldberg, Lisa R. and Papanicolaou, Alex, The Implied Futures Financing Rate (February 20, 2021). Available at SSRN: https://ssrn.com/abstract=3804068 or http://dx.doi.org/10.2139/ssrn.3804068

Nicholas Gunther (Contact Author)

University of California, Berkeley ( email )

POB 13234
Oakland, CA 94661
United States

Robert Anderson

University of California, Berkeley ( email )

Lisa R. Goldberg

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Alex Papanicolaou

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

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