Department of Economics and Business Economics

A No-Arbitrage Fractional Cointegration Model for Futures and Spot Daily Ranges

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The no-arbitrage relation between futures and spot prices implies an analogous
relation between futures and spot daily ranges. The long-memory features of the
range-based volatility estimators are analyzed, and fractional cointegration is tested
in a semi-parametric framework. In particular, the no-arbitrage condition is
used to derive a long-run relationship between volatility measures and to justify
the use of a fractional vector error correction model (FVECM) to study their
dynamic relationship. The out-of-sample forecasting superiority of FVECM, with
respect to alternative models, is documented. The results highlight the importance
of incorporating the long-run equilibrium in volatilities to obtain better
forecasts, given the information content in the volatility of futures prices.
Original languageEnglish
JournalJournal of Futures Markets
Pages (from-to)77-102
Publication statusPublished - 2013

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