The pricing of electricity futures: Evidence from the European energy exchange

This study investigates the pricing of electricity futures at the European Energy Exchange (EEX) over the period 2002 through 2004. To calculate theoretical contract values, the reduced‐form models of J. J. Lucia and E. S. Schwartz (2002) are used, and a thorough empirical analysis by means of an out‐of‐sample test is conducted for both one‐ and two‐factor models, incorporating a constant non‐zero price of risk. Although the models are proven to capture all basic spot market characteristics and provide an accurate in‐the‐sample fit to observed futures prices, the forecasting performance is subject to biases. For instance, it was found that the relative mispricing depends on both the spot price level and the remaining time‐to‐maturity of the futures contracts. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:387–410, 2007     

Does franchising pay? Evidence from the restaurant industry

Franchising has taken a prominent position in service industries for several decades, but little is known about how franchising affects financial performance. Thus, we addressed the question of whether chains that franchise to some extent outperform those that are wholly owned. Then, among chains that franchise, we also addressed the question of whether more franchising is better – that is, whether the proportion of a chain's units that are franchised is associated with superior financial performance. To answer these questions, our study first compares the risk-adjusted performance of franchising vs. non-franchising restaurant firms. Second, it investigates the relationship between franchising propensity and firm financial performance. We considered five different measures of firm financial performance: the Sharpe ratio, the Treynor ratio, the Jensen index, the Sortino ratio, and the upside potential ratio. On comparison of franchising and wholly owned firms, all five measures indicated that franchising firms outperformed their non-franchising counterparts. When we focussed on just the franchising firms, however, the results were less clear. Among firms that franchise, the franchising–performance relationship was positive and significant only with respect to the Jensen index. Thus, we provide very robust evidence that franchising pays – that is, that some franchising is good – but among firms that franchise, it is unclear whether more franchising is better.     

Measuring Investors’ Socially Responsible Preferences in Mutual Funds

The aim of this study is to analyze investor behavior towards socially responsible mutual funds. The analysis is based on an experimental study where a sample of individuals takes investment decisions under different parameters of information about the investment alternatives and expected returns. In the experiment, each participant decides how to distribute an investment budget between two funds, returns on which are uncertain and change over time. Two treatments are conducted, each providing a different degree of information on the socially responsible (SR) character of one of the two investment alternatives. The results obtained suggest that although individuals’ criteria for investment are essentially guided by returns and diversification, participants invest significantly more in a fund when they are explicitly informed about its SR nature. In particular, participants who declare being concerned about SR actually invest significantly more in the SR alternative. Furthermore, the level of SR faithfulness among a small group of investors is such that they invest the main share of their budget in the SR fund, even when the return differential is highly unfavorable. Providing clear information about the SR characteristics of an investment is crucial to help investors express their preferences.     

Performance Analysis of Sustainable Investments in the Brazilian Stock Market: A Study About the Corporate Sustainability Index (ISE)

In this article, we studied the Corporate Sustainability Index (ISE) of the Brazilian Mercantile, Futures and Stock Exchange (BM&FBOVESPA), with the main objective of analyzing the performance of sustainable investments in the Brazilian stock market, during the period from December 2005 to December 2010. To achieve this aim, we characterized ISE portfolios and we compared its performance with the IBOVESPA (representing the market portfolio) and other BM&FBOVESPA sectoral indices. In the performance comparison, we used level of liquidity, return and risk indicators, as well as the following measures: Sharpe, Treynor, Sortino, and Omega. Our results show that although sustainable investments have presented some interesting characteristics, such as increasing liquidity and low diversifiable risk, they did not achieve satisfactory financial performance in the analysis period. This indicates that the constraints imposed by this type of investment in capital allocation in Brazil may be harming their return and risk attractiveness.     

Socially Responsible Investing: An Investor Perspective

Given the growing importance of Socially Responsible Investing (SRI), it is surprising that there is no consensus of what the term SRI means to an investor. Further, most studies of this question rely solely on the views of investors who already invest in SRI funds. Our study surveys a unique pool of approximately 5,000 investors that contains both investors who have used SRI criteria in investment decisions and those who have not, and involves a broad array of criteria associated with SR investing. Our findings offer new insight into the SRI debate. For both sets of investors, environmental and sustainability issues dominate as the major category associated with SR investing. We find strong agreement in the ranking of the relative importance of various SRI factors despite differences between these two groups in their opinion of their overall importance. We also find that investors prefer to consider the SRI question in more holistic terms rather than using the exclusionary format favored by most SRI funds. Investors seem to prefer to reward firms who display overall positive social behavior rather than to exclude firms on the basis of certain products or practices. These findings can help providers of SR investment vehicles to improve the SRI products that they offer to the general investor, thus both encouraging the initial adoption of SR criteria by investors and increasing overall investment in SR choices.     

Long‐term Futures Curves and Seasonal Structures of Wheat in the European Union and the United States

A two‐factor affine theoretical model is used to estimate the long‐term futures curves for wheat in the European Union and the United States, as represented by the Euronext and CME markets, respectively. The CME futures curve exhibits a long‐term equilibrium; in contrast, the Euronext futures curve does not show a tendency for futures to revert to a long‐term equilibrium value. The estimated seasonality is relatively similar for both markets. However, the seasonal minimum and maximum points in the futures curve occur one to two months later for Euronext compared to the CME. More importantly, the futures curve for Euronext has a much more marked seasonality than the CME futures curve. Credible intervals of the futures curves are also estimated. The width clearly increases for longer maturities, but it does so much faster for Euronext than for the CME. For long‐maturity futures, variability in the parameter estimates (as opposed to the residual errors) accounts for most of the width of the credible intervals, especially for Euronext. The proposed model can be used to price long‐term futures options, long‐term price insurance, and long‐term swaps, among other applications. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 33:1118–1142, 2013     

Delivery risk and the hedging role of options

Multiple delivery specifications exist on nearly all commodity futures contracts. Sellers typically are allowed to deliver any of several grades of the underlying commodity and at any of several locations. On the delivery day, the futures price as such needs not converge to the spot price of the par‐delivery grade at the par‐delivery location, thereby imposing an additional delivery risk on hedgers. This article derives the optimal hedging strategy for a risk‐averse hedger in the presence of delivery risk. In particular, it is shown that the hedger optimally uses options on futures for hedging purposes. This article provides a rationale for the hedging role of options when futures markets allow for multiple delivery specifications. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:339–354, 2002     

How about selling commodity futures losers?

This paper explores the benefits of extending the investment universe to commodity futures, from the perspective of momentum traders. We find that the growth-optimal portfolio includes negative (positive) weights on commodity futures losers (stock winners). Motivated by this finding, we construct a joint momentum strategy, buying stock winners and selling commodity futures losers, and show that it generates an average monthly return of up to 1.91% and provides much lower skewness (0.04) and kurtosis (1.27) than a traditional stock momentum strategy. It also greatly improves profitability, especially in unfavorable market states, and thus effectively manages tail risk.     

Trading activity in stock index futures markets: The evidence of emerging markets

This study investigates the trading activity of the Taiwan Futures Exchange (TAIFEX) and Singapore Exchange Derivatives Trading Limited (SGX‐DT) Taiwan Stock Index Futures markets by analyzing the intraday patterns of volume and volatility. In addition, the market closure theory, which may explain such patterns, is examined. Overall, the trading pattern appears to be U‐shaped for the TAIFEX futures and U+W‐shaped for the SGX‐DT. For the SGX‐DT futures, volatility follows the same pattern as that of the number of price changes. For the TAIFEX futures, however, after the peak at the close of the spot market, the volatility in the TAIFEX futures drops consistently until the end of the day while volatility in the SGX‐DT still reaches a smaller peak at the close of the futures market. In addition, a visual inspection of the intraday patterns of these two markets shows that the market closure theory can effectively explain the intraday patterns of these two markets. The empirical results support the market closure theory in that liquidity demand from traders rebalancing their portfolios before and after market closures creates larger volume and volatility at both the open and close. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:983–1003, 2002     

Optimal futures hedging for energy commodities: An application of the GAS model

This paper applies generalized autoregressive score-driven (GAS) models to futures hedging of crude oil and natural gas. For both commodities, the GAS framework captures the marginal distributions of spot and futures returns and corresponding dynamic copula correlations. We compare within-sample and out-of-sample hedging effectiveness of GAS models against constant ordinary least square (OLS) strategy and time-varying copula-based GARCH models in terms of volatility reduction and Value at Risk reduction. We show that the constant OLS hedge ratio is not inherently inferior to the time-varying alternatives. Nonetheless, GAS models tend to exhibit better hedging effectiveness than other strategies, particularly for natural gas.     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

Approximation for convenience yield in commodity futures pricing

The pricing of commodity futures contracts is important both for professionals and academics. It is often argued that futures prices include a convenience yield, and this article uses a simple trading strategy to approximate the impact of convenience yields. The approximation requires only three variables—underlying asset price volatility, futures contract price volatility, and the futures contract time to maturity. The approximation is tested using spot and futures prices from the London Metals Exchange contracts for copper, lead, and zinc with quarterly observations drawn from a 25‐year period from 1975 to 2000. Matching Euro‐Market interest rates are used to estimate the risk‐free rate. The convenience yield approximation is both statistically and economically important in explaining variation between the futures price and the spot price after adjustment for interest rates. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1005–1017, 2002     

Franchising and firm financial performance among U.S. restaurants

Franchising has attracted the attention of retailing and entrepreneurship scholars in the past three decades, but evidence pertaining to how franchising affects financial performance is mixed and inconclusive. Thus, the question remains as to whether franchising firms exhibit better financial performance than non-franchising firms in the same industry. In order to find an answer to this question, our study compares the risk-adjusted financial performance of franchising versus non-franchising restaurant firms over the 1995–2008 interval, using five different performance measures: the Sharpe Ratio, the Treynor Ratio, the Jensen Index, the Sortino Ratio, and the Upside Potential Ratio. For each measure, the results revealed that franchising restaurant firms outperformed their non-franchising counterparts. Thus, we provide very robust evidence that franchising is superior on average in the restaurant industry, which can help explain the increasing popularity of franchising as a business form.     

Hedging and value at risk: A semi‐parametric approach

The non‐normality of financial asset returns has important implications for hedging. In particular, in contrast with the unambiguous effect that minimum‐variance hedging has on the standard deviation, it can actually increase the negative skewness and kurtosis of hedge portfolio returns. Thus, the reduction in Value at Risk (VaR) and Conditional Value at Risk (CVaR) that minimum‐variance hedging generates can be significantly lower than the reduction in standard deviation. In this study, we provide a new, semi‐parametric method of estimating minimum‐VaR and minimum‐CVaR hedge ratios based on the Cornish‐Fisher expansion of the quantile of the hedged portfolio return distribution. Using spot and futures returns for the FTSE 100, FTSE 250, and FTSE Small Cap equity indices, the Euro/US Dollar exchange rate, and Brent crude oil, we find that the semiparametric approach is superior to the standard minimum‐variance approach, and to the nonparametric approach of Harris and Shen (2006). In particular, it provides a greater reduction in both negative skewness and excess kurtosis, and consequently generates hedge portfolios that in most cases have lower VaR and CVaR. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:780–794, 2010     

Hedging in Futures and Options Markets with Basis Risk

This paper analyzes the hedging decisions for firms facing price and basis risk. Two conditions assumed in most models on optimal hedging are relaxed. Hence, (i) the spot price is not necessarily linear in both the settlement price and the basis risk and (ii) futures contracts and options on futures at different strike prices are available. The design of the first‐best hedging instrument is first derived and then it is used to examine the optimal hedging strategy in futures and options markets. The role of options as useful hedging tools is highlighted from the shape of the first‐best solution. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:59–72, 2002     

An analysis of the relationship between electricity and natural‐gas futures prices

This article analyzes the relationship between electricity futures prices and natural‐gas futures prices. We find that the daily settlement prices of New York Mercantile Exchange's (NYMEX's) California–Oregon Border (COB) and Palo Verde (PV) electricity futures contracts are cointegrated with the prices of its natural‐gas futures contract. The coefficient of natural‐gas futures prices in our model of COB electricity futures prices is not significantly different from the coefficient of gas prices in our model of PV electricity although there are differences in the production of electricity in these two service areas. The coefficients in our model do reflect differences in the consumption of electricity in the COB and PV service areas, however. Our trading‐rule simulations indicate that the statistically significant mean reversion found in the relationship between electricity and natural‐gas futures prices also is economically significant in both in‐sample and out‐of‐sample tests. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:95–122, 2002     

What moves German Bund futures contracts on the Eurex?

The German 10‐year Bund futures contract traded on the Eurex futures and options exchange in Frankfurt became the world's most actively traded derivative product by the end of 1999. In this article, we provide a detailed exploration of the interday and intraday return volatility in the Bund futures contract using a sample of five‐min returns from 1997 to 1998. The evolution of interday volatility is described best by a MA(1)‐fractionally integrated process that allows for the long‐memory features. At the intraday level, we find that macroeconomic announcements from both Germany and the U.S. are an important source of volatility. Among the various German announcements, we identify the IFO industry survey of business climate, industrial production (preliminary), and Bundesbank policy meeting as being by far the most important. The three most significant U.S. announcements include the employment report, the National Association of Purchasing Managers (NAPM) survey, and employment costs. Overall, U.S. macroeconomic announcements have a far greater impact on the Bund futures market than their German counterparts. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:679–696, 2002     

Do futures‐based strategies enhance dynamic portfolio insurance?

In this paper we investigate the relative performance of two approaches to dynamic portfolio insurance: the synthetic put and the Constant Proportion Portfolio Insurance (CPPI). The investigation is conducted on the Australian market, over a sample period of 59 non‐overlapping quarters from December 1987 to December 2002. Its main contribution is to provide a comprehensive assessment of the two approaches under different market conditions, and the testing of ex ante information as an input into the trading program. The major finding is that the futures‐based implementation of both synthetic put and the CPPI approach is robust to both tranquil and turbulent market conditions in preserving the desired floor. The fact that this conclusion includes the case of employing implied volatility (obtained from the options market) is highly encouraging as it suggests high implementability of the strategy. Notably, the risk‐return tradeoff shows that portfolio insurance using this volatility measure yields a return that is 64 basis points over the risk free investment. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:591–608, 2004     

The limits of leverage

When trading incurs proportional costs, leverage can scale an asset's return only up to a maximum multiple, which is sensitive to its volatility and liquidity. In a model with one safe and one risky asset, with constant investment opportunities and proportional costs, we find strategies that maximize long‐term returns given average volatility. As leverage increases, rising rebalancing costs imply declining Sharpe ratios. Beyond a critical level, even returns decline. Holding the Sharpe ratio constant, higher asset volatility leads to superior returns through lower costs.     

New product decision making: How chance and size of loss influence what marketing managers see and do

This article empirically examines, in a new‐product decision context, the relationships among risk propensity, perceived risk, and risky choice decisions, when risk is operationalized as the chance of loss and the size of loss. The results indicate that perceptions of chance of loss directly influence choice among alternatives possessing different chances of loss and gain, whereas risk propensity directly influences choice among alternatives that differ in their size of loss and gain. The findings extend previous research by identifying dimension‐specific effects (a) between who the decision maker is and the size of an investment's potential loss, and (b) between what the decision maker sees and the chance that an investment will experience a loss. These results not only contribute to theory, but also provide marketing managers with guidance for their risky choice decisions. The composition of a new product's risk has implications for the decisions marketing managers make, for the placement of managers in risk‐sensitive positions, and for the presentation of information to individuals with oversight responsibility for the firm's product strategy decisions. © 2002 Wiley Periodicals, Inc.