Graduate School of Management. UCLA, Los Angeles. This research was supported by the Center for the Study of Futures Markets, Columbia University, and the Foundation for Research in Economics and Education, UCLA. We would like to thank Gordon Alexander, Fischer Black, Michael Brennan, Tom Copeland, Robert Geske, Dave Mayers, Richard Roll, Mark Rubinstein, Clifford Smith, Hans Stoll, and, particularly, George Constantinides for helpful comments.
Taxes and the Pricing of Stock Index Futures
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 3, pages 675–694, June 1983
How to Cite
CORNELL, B. and FRENCH, K. R. (1983), Taxes and the Pricing of Stock Index Futures. The Journal of Finance, 38: 675–694. doi: 10.1111/j.1540-6261.1983.tb02496.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no-tax models predict.