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Difference Systems in Financial Futures Markets

1982; Wiley; Volume: 37; Issue: 5 Linguagem: Inglês

10.2307/2327843

1540-6261

Thomas Eric Kilcollin,

Economic theories and models

The Journal of FinanceVolume 37, Issue 5 p. 1183-1197 Article Difference Systems in Financial Futures Markets THOMAS ERIC KILCOLLIN, THOMAS ERIC KILCOLLINVice President, Chicago Mercantile Exchange. This research was conducted while the author was Economist, Financial Studies Section, Board of Governors of the Federal Reserve System. The opinions in this paper are those of the author and do not necessarily reflect the opinions of the Board of Governors or its staff. Thanks to the editor and Bradford Cornell for many helpful suggestions.Search for more papers by this author THOMAS ERIC KILCOLLIN, THOMAS ERIC KILCOLLINVice President, Chicago Mercantile Exchange. This research was conducted while the author was Economist, Financial Studies Section, Board of Governors of the Federal Reserve System. The opinions in this paper are those of the author and do not necessarily reflect the opinions of the Board of Governors or its staff. Thanks to the editor and Bradford Cornell for many helpful suggestions.Search for more papers by this author First published: December 1982 https://doi.org/10.1111/j.1540-6261.1982.tb03611.xCitations: 26 Read the full textAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onEmailFacebookTwitterLinkedInRedditWechat ABSTRACT Many financial futures markets allow substitutions for the par grade of security at delivery. Substitutes are deliverable at premiums or discounts—"differences" in commodities parlance—to the futures price. The rule that establishes these differences is called a difference system. This paper characterizes financial futures market equilibrium with yield-based difference systems and investigates particular systems in use. The major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security. REFERENCES 1 M. Bailey. "Capital Gains and Income Taxation-. In Harberger and Bailey (eds.), The Taxation of Income from Capital, Washington: Brookings Institution: 1969. 2 E. Elton and M. Gruber. "Marginal Stockholder Tax Rates and the Clientele Effect-. Review of Economics and Statistics 52 (February 1970), 64–70. 3 J. Green. "Taxation and the Ex-Dividend Day Behavior of Common Stock Prices". Harvard Institute of Economic Research, Discussion paper no. 772 (June 1980). 4 A. Kalay. "The Ex-Dividend Day Behavior of Stock Prices: A Reexamination of the Clientele Effect-. Journal of Finance 37 (September 1982), 1059–70. 5 J. Lakonishok and T. Vermaelen. "Tax Reform and Ex-Dividend Day Behavior". University of British Columbia Working Paper No. 790 (September 1981). 6 M. Miller and M. Scholes. "Dividends and Taxes: Empirical Evidence". University of Chicago Working Paper (1980). 7 I. Morgan. "Dividends and Stock Price Behavior in Canada-. Journal of Business Administration 12 (Fall 1980), 91–107. 8 A. Protopapadakis. "Some Indirect Evidence on Effective Capital Gains Tax Rates-. Journal of Business 56 (April 1983), 127–39. 9 Revenue Canada. Taxation Statistics. Ottawa: Supply and Services Canada, (197281). 10 Revenue Canada. The Income Tax Act: Interpretation Bulletins. Interest and Dividend Income (January 1981), Taxable Dividends (June 1978), Losses on Shares (March 1979). 11J. Williamson. " Canadian Capital Markets. In Proposals for a Securities Market Law in Canada, Ottawa: Supply and Services Canada, 1979. Citing Literature Volume37, Issue5December 1982Pages 1183-1197 ReferencesRelatedInformation