International Journal of Business and Economics Volume 6, No. 2 August, 2007

General Equilibrium Stock Index Futures Pricing Allowing for Event Risk

Simon H. Yen

Department of Finance, National Chengchi University, Taiwan

Jai Jen Wang

Department of Finance, Feng Chia University, Taiwan

Abstract

This study develops a new futures pricing model and derives its analytic solution. Comparative static and simulation results are also presented. Under this general equilibrium framework, we find that bounded degrees of state variables in the broad economy determine co-varying extents among various important market variables. However, increasing event risk, including the sizes of occurrence probability and corresponding impulse effects, makes their analysis intractable.

Keywords：general equilibrium model, event risk, intertemporal futures pricing.

JEL Classifications：D52, G13.

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