Constructing accurate cash settlement indices: The role of index specifications

• Published in: The journal of futures markets Vol. 12; no. 3; pp. 339 - 360
• Main Authors: Cita, John, Lien, Donald
• Format: Journal Article
• Language: English
• Published: New York Wiley Subscription Services, Inc., A Wiley Company 01.06.1992; Wiley-Blackwell; Published by J. Wiley in affiliation with the Center for the Study of Futures Markets, Columbia University; Wiley Periodicals Inc
• Subjects: Börse; Financial futures; Futures market; Index; Indexing; Kommunalverschuldung; Market prices; Mathematical models; Monte Carlo simulation; Securities analysis; Theorie; USA; Öffentliche Anleihe; United States > US
• ISSN: 0270-7314; 1096-9934
• DOI: 10.1002/fut.3990120308

All cash settlement contracts are susceptible to sampling and nonsampling errors, while those that depend on external pricing agents are also subject to the possibility of intentional bias. The proper specification of settlement procedures plays an important role in keeping the various sources of index error in check. Contract design features that might be used to mitigate all sources of index inaccuracy are analyzed. Even with a well-designed price monitoring scheme, small errors can go undetected. This highlights the importance of selecting the best possible price aggregation procedure. Compared with all other linear estimators, the simple mean (SIM), in many settings, provides reporting agents with the least incentive to report biased prices. The same can be said about its ability to minimize the influence of nonsampling error. Thus, for most applications, the SIM is the best overall estimator.