Why Global Equity Futures Can Diverge from Their Index
Summary
The document explains why an equity index future may appear to fall far less than its underlying index during a sharp market move. For a global index such as MSCI World, constituent markets trade in different time zones, so many index prices can remain fixed at their local closing levels while the futures contract continues trading. The futures price can therefore reflect an estimate of the index value implied by currently active markets, rather than a direct comparison with a fully updated index.
It also identifies low futures liquidity and stale or delayed price data as possible sources of wider apparent gaps, especially during volatile periods. A further distinction is whether the quoted index is a price-return index while the futures value reflects dividends and financing effects. These are possible explanations to check, not a calculation that establishes which one caused the example discrepancy. The document contrasts global futures with more liquid single-country contracts and cautions that cross-market price comparisons can be misleading when trading hours and update timing differ.
Key ideas
- Global index futures trade while many constituent stock markets are closed, leaving some index prices stale.
- A futures quote can incorporate expectations about constituent prices that have not updated in the index.
- Low liquidity, delayed data, and volatility can increase apparent futures-to-index discrepancies.
- Price-return indices omit dividends, which can contribute to differences from futures values.
- Check market hours, quote timing, liquidity, dividends, and financing before interpreting a gap.
Tags
Full text
# Why are equity futures so disconnected to the underlying index? Example # Why are equity futures so disconnected to the underlying index? Example I am looking at ZWPH0 which is a future and the underlying index MSCI World. According to Bloomberg the prices are as follow: - 13 March 2020: MSCI World 451 / ZWPH0 5234 - 16 March 2020: MSCI World 410 / ZWPH0 5160 MSCI world is losing 9% and the future only 1.5%. Is there any reason for this? ## Answer by Chris Taylor (score 3) https://quant.stackexchange.com/a/58082 MSCI World futures are traded nearly 24 hours, while the index constituents only update their prices when their local country stock markets are open - typically this means 1/3 to 2/3 of the index constituent prices are actively updating, the rest are frozen at their last close price. The futures price can be thought of as the market’s guess at the true index level, if all the constituent markets were open. Additionally, MSCI World futures are not very liquid so the differences can be even larger. For a single-country index with liquid futures (eg S&P 500) you will see much smaller divergences. ## Answer by ThatDataGuy (score 0) https://quant.stackexchange.com/a/53484 Most equity index futures have daily settlement to the closing value of the index, so any difference intra-day will be due to supply and demand factors, or perhaps trading suspensions. However, its also possible that one of the prices you see is delayed. You should avoid comparing assets during large moves or large volatility as this tends to magnify the effect of pricing delays etc. ## Answer by JoshK (score 0) https://quant.stackexchange.com/a/58083 You are confusing the "Total Return" with "Price Return" You didn't put up the ticker for the related index but I assume you are looking at the price return. The future's market value will increase as the dividends are paid out. The index you are using is most likely the price return index, which doesn't include the effect of the dividends. Also, the financing during that period got into the negatives - so that will lead to positive drift in the price as well.
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