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Macro MarketsCreating Institutions for Managing Society's Largest Economic Risks$
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Robert J. Shiller

Print publication date: 1998

Print ISBN-13: 9780198294184

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198294182.001.0001

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The Construction of Index Numbers for Contract Settlement

The Construction of Index Numbers for Contract Settlement

(p.116) 6 The Construction of Index Numbers for Contract Settlement
Macro Markets

Robert J. Shiller (Contributor Webpage)

Oxford University Press

When creating indices intended for use in cash settlement of futures contracts (or perpetual claims or options, or swaps, or other over‐the‐counter forward contracts or retail insurance contracts), it is critical that that each index represents value associated with a standard claim on future income (or services). The contract settlement must reflect the price of claims on income streams, so that the market can be used to hedge the risk associated with the claims, but the problem is that the available observations on prices or incomes may apply to dissimilar claims, and that standardization in the indices used to settle contracts is essential to liquidity in these markets. This chapter first reviews some existing index number methods, and then extends these methods to deal with the problems described. Chain index and hedonic index number methods are reviewed, and ordinary repeated‐measures indices (like the repeat sales indices) are shown to be in a sense a special case of these, and to have strong parallels to some existing indices used to settle contracts. The last part of the chapter introduces the hedonic repeated‐measures index to allow for control of changing price of quality variables, while retaining the repeated‐measures design.

Keywords:   cash settlement, chain indices, contract settlement, economic indices, forward contracts, futures contracts, futures markets, hedging markets, hedging risk, hedonic indices, hedonic repeated‐measures indices, index number construction, index number methods, index numbers, perpetual claims, perpetual options, repeated‐measures indices, retail insurance contracts, standard claims on future income, swaps

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