Modeling Index Futures Basis Convergence for Hedging

Summary

This research summary examines what drives convergence in the basis of stock index futures and how those drivers can inform cash-and-futures hedging. After accounting for dividend effects, it identifies the current contract’s annualized basis, the index’s subsequent return, and the term structure of basis across available contracts as factors associated with convergence speed.

The authors describe attributing changes in convergence speed to these conditions and fitting a linear regression to historical observations. They use the resulting estimates to quantify expected convergence under different market environments and to guide a spot-versus-futures hedge. The available text contains only a brief abstract and points to a longer report; it provides no regression specification, sample details, performance figures, or discussion of trading costs and model risk. The proposed relationships and their practical value therefore cannot be independently assessed from this summary alone.

Key ideas

• Basis convergence is examined after accounting for dividend effects.
• The current annualized basis, subsequent index returns, and the basis term structure are identified as relevant factors.
• Historical regression is used to estimate convergence speed under different market conditions.
• The estimates are intended to inform hedging between index exposure and futures.
• The excerpt gives no model details or hedge performance evidence.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.