An examination of stock index futures forecasting ability using the S&P 500 index futures and the value line index futures

Recently, derivatives such as futures and options have come under attack for their role in the demise of Barings Bank and the Orange County scandal. However, more people are investing their money in stock index futures and options to earn a "market" rate of return. In addition, the stock market is considered a barometer of future economic activity. Therefore, the role of options needs to be reexamined. Specifically, this study is concerned with stock index futures and its forecasting ability of the future spot index value. The history of stock index futures contracts is a relatively short one, beginning in 1982. Stock index futures have been useful for trading purposes, hedging cash positions of portfolios, and arbitrage between the cash and futures markets. Another useful function is for investors to earn a "market" rate of return. In addition, these contracts may provide a free, public forecast of the subsequent spot price of the underlying index. Therefore, the purpose of this study is to determine whether futures contract prices can accurately predict the future spot price of the underlying index. Both the Value Line and Standard and Poor's 500 indexes will be used for this research.