Introduction
he Nikkei Stock Average Futures contract started trading at the Singapore T International Monetary Exchange (SIMEX) on September 3, 1986. SIMEX became the first futures exchange to trade a stock index futures outside the country where the indexed stocks are traded. The stock index is a price-weighted index of 225 stocks selected from the first section of the Tokyo Stock Exchange. The stock index futures contract at SIMEX is traded in yen at a price of 500 times the index with a minimum price movement of 2500 yen. The contract is settled on a cash basis without actual delivery of share certificates. The Eurodollar futures contract, the high-sulfur fuel oil futures contract, and the Nikkei stock index futures contract are all actively traded at SIMEX. The number of Nikkei contracts traded daily has increased from about 2000 in 1988 to about 4000 in 1989. Despite the introduction, in September 1988, of a similar Nikkei futures contract in Osaka and the Topix futures contract in Tokyo, the Nikkei contract at SIMEX continues to be actively traded with no drop in trading volume.
ARBITRAGE AND PRICE BEHAVIOR
Brenner, Subrahmanyam, and Uno (1989) studied the arbitrage relationship between the prices of Japanese stocks traded on the Tokyo Stock Exchange as reflected in the Nikkei stock index and the prices of the Nikkei futures contract traded on SIMEX. Using the cost-of-carry model with discrete dividends but continuous interest compounding, they reported that transaction costs alone could not account for the significant overpricing of the futures by the model in the period from September 1986 to April 1988. Using the cost-of-carry model with continuous interest and dividend yield, Bailey (1989) found that for the March 1987 and June 1987 Nikkei futures contracts, the theoretical prices explained the actual prices quite well. He also employed the continuous-time model as in Ramaswamy and Sundaresan (1985), and reported that the pricing errors from the continuous-time model are not substantially different from those reported for the cost-of-carry model.