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2006 | nr 2 Financial markets : principles of modeling forecasting and decision-making | 183--205
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The Cost-of-Carry Model for the FW20 Futures Contracts: Threshold Cointegration Framework

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Chapter 11 presents the cost-of-carry model for futures contracts on the Warsaw Stock Exchange index WIG20. Intraday one-minute data has been used. It has been found that the presence of transaction costs causes mispricing series from non-arbitrage cost-of-carry relationships to have a nonlinear form. Arbitrageurs take a long or a short position only if the mispricing is greater in magnitude than a certain threshold. This causes the dynamics of the mispricing series to be effectively described by threshold autoregressive processes with three regimes. Such processes allow for a unit-root behavior in a middle regime, while at the same time being globally second-order stationary. In the chapter a non-arbitrage relationship is examined in the threshold cointegration framework. (fragment of text)
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