Futures and forward price differential and the effect of marking‐to‐market: Australian evidence

The objective of this paper is to examine the effects of marking‐to‐market of futures contracts on the price differential between futures and forward contracts based on the predictions of the Cox, Ingersoll and Ross (1981) (CIR) model. Cox et al ., (1981) derive a series of propositions with respect to the relationship between futures and forward prices and a set of testable implications. These are tested empirically in this paper using Australian data from November 1991 to June 1997. The results provide evidence of the presence of significant futures and forward price differences, where the futures price is consistently below the forward price. Only partial support is found for the Cox et al ., (1981) propositions, implying that the effect of marking‐to‐market is not able to fully account for the price differential. Therefore, it is not possible to rule out the influence of other institutional factors on the futures‐forward price difference.     

A Comparison of Forward and Futures Prices of an Interest Rate-Sensitive Financial Asset

This paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts. Specifically, it investigates the effect of marking-to-market on the observed price differences using the pricing model described in Cox, Ingersoll, and Ross (CIR) (1981, Journal of Financial Economics 9, 321–346). Using previously unavailable data, this paper employs Eurodollars, an interest rate-sensitive financial asset, to test the CIR model. Unlike prior empirical studies, test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences.     

Odd‐lot Costs and Taxation Influences on Stock Dividend Ex‐dates

Abstract:   Past research has revealed significant abnormal ex‐date returns for stock dividends even though the ex‐date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd‐lot share parcels compared to round‐lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex‐date price reaction of stock dividends distributed when odd‐lot transaction costs were charged to those issued when odd‐lot costs were not evident. As odd‐lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd‐lot transactions costs have in explaining stock dividend ex‐date returns. We find that prior to October 1991 stock dividend ex‐dates exhibit significantly positive returns, however, we do not find any significant ex‐date return once the higher odd‐lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex‐date price reaction and we find evidence that imputation tax credits have a value greater than zero.     

A comparison of futures and forward prices

This paper uses the pricing models of Cox, Ingersoll and Ross (1981), Richard and Sundaresan (1981), and French (1982) to examine the relation between futures and forward prices for copper and silver. There are significant differences between these prices. The average differences are generally consistent with the predictions of the futures and forward price models. However, these models are not helpful in describing intra-sample variations in the futures-forward price differences. This failure is apparently caused by measurement errors in both the price differences and in the explanatory variables.     

Forward and Futures Prices: Evidence from the Foreign Exchange Markets

Cornell and Reinganum (1981) , hereafter CR, report that price differentials for future contracts and forward contracts are statistically insignificant in foreign exchange markets. Based on this finding, CR conclude that marking-to-market is insignificant in the formulation of currency futures prices. This note identifies two potential concerns with the CR tests. One problem relates to the timing of delivery dates for “matched” contracts. A second problem relates to the time period for the CR study. We show that correcting for these problems does not affect the overall conclusions of the CR study; marking-to-market does not appear to have a significant effect on currency futures prices.     

Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts

In a seminal article, Samuelson (1965) [Samuelson, P. A. (1965), “Proof that properly anticipated prices fluctuate randomly,” Industrial Management Review 6, 41-49.] proposes the maturity effect that the volatility of futures prices should increase as futures contract approaches maturity. This study provides new evidence on the maturity effect by examining a more extensive set of futures contracts than previous studies and analyzing each contract separately. Using 6805 futures contracts drawn from 61 commodities, including some data from non-US markets, we find that the maturity effect is absent in the majority of contracts. In addition, the maturity effect tends to be stronger in agricultural and energy commodities than in financial futures. We also examine the hypothesis in Bessembinder et al. (1996) [Bessembinder, H., J. F. Coughenour, P. J. Seguin, & M. M. Smoller (1996), “Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis,” Journal of Derivatives 4, 45-58.], which states that negative covariance between the spot price and net carry cost causes the maturity effect in futures. Our results provide very weak evidence in favor of this hypothesis.     

A Likelihood Ratio Test of Price Volatilities: Comparing Stock Index Spot and Futures

This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.     

Market Valuation of Successful versus Non‐successful R&D Efforts in the Pharmaceutical Industry

Abstract:   This paper examines the relationship between a non‐financial measure of successful research and development (R&D) efforts in the pharmaceutical industry and R&D expenditures. I hypothesize that the R&D of successful producers will be valued more by the market than the R&D of non‐successful producers. The regression results support the hypothesis. In the primary model, R&D is not associated with price; however, the coefficient on the interaction between R&D and successful developers is positively related to stock price. This implies that the market values the R&D expenditures of successful developers but not the expenditures of less‐successful developers.     

A PRICING ANOMALY IN TREASURY BILL FUTURES

This research applies an entirely new approach to examining the efficiency of futures markets for Treasury bills and avoids many shortcomings of previous studies that rely on comparing yields on spot versus futures market positions. Efficiency is examined by comparing the consistency of yields within the futures market itself since, at one time, the International Monetary Market (IMM) traded futures contracts for both three-month and one-year bills. The results indicate a remarkably large average annual yield differential of 32 basis points when the yields on the one-year contract are compared to the appropriate corresponding strip of three-month contracts. Possible explanations such as low volume, market thinness, transaction costs, strategy interdependence, serial correlation among differences, and daily resettlement (the Cox, Ingersoll, and Ross effect) are unsuccessful in explaining this pricing anomaly.     

"Marking-to-Market" and Treasury-Bill Futures Prices: Some Empirical Evidence

Financial economists have not found empirical evidence of a “marking‐to‐market” effect in Treasury‐bill futures contracts, despite a firm theoretical basis for its existence. Therefore, we speculate that confounding effects, possibly due to liquidity preferences, influence futures‐forward price spreads. By using an empirical specification that allows for both effects, we present empirical evidence that Treasury‐bill futures‐forward price spreads are sensitive to the volatility of the underlying commodity in ways predicted by the theory of the marking‐to‐market effect.     

A Pricing Framework for Real Estate Derivatives

New methods are developed here for pricing the main real estate derivatives — futures and forward contracts, total return swaps, and options. Accounting for the incompleteness of this market, a suitable modelling framework is outlined that can produce exact formulae, assuming that the market price of risk is known. This framework can accommodate econometric properties of real estate indices such as predictability due to autocorrelations. The term structure of the market price of risk is calibrated from futures market prices on the Investment Property Databank index. The evolution of the market price of risk associated with all five futures curves during 2009 is discussed.     

An analysis of the true notional bond system applied to the CBOT T-bond futures

The conversion factor system (CFS) is used in the determination of the invoice price of the Chicago Board of Trade Treasury-bond futures. As an alternative to the CFS, Oviedo [Oviedo, R.A., 2006. Improving the design of Treasury-Bond futures contracts. The Journal of Business 79, 1293–1315] proposed the True Notional Bond System (TNBS), and showed that it outperforms the CFS when interest rates are deterministic. The main purpose of this paper is to compare the effectiveness of the two systems in a stochastic environment. In order to do so, we price the CBOT T-bond futures as well as all its embedded delivery options under both the CFS and the TNBS. Our pricing procedure is an adaptation of the Dynamic Programming algorithm described in Ben-Abdallah et al. [Ben-Abdallah, R., Ben-Ameur, H., Breton, M., 2007. Pricing CBOT Treasury Bond futures. Les Cahiers du GERAD G-2006-77]. Numerical illustrations show that, in a stochastic framework, TNBS does not always outperform the CFS. However, as the long-term mean moves away from the level of the notional rate, the TNBS performs increasingly better than the CFS.     

The Forward Premium in the Nord Pool Power Market

This article investigates the forward premium of futures contracts in the Nordic power market for the time period from January 2004 to December 2013. We find that futures prices are biased predictors of the subsequent spot prices and that there is a significant forward premium in the Nord Pool market, particularly during the winter and autumn. We analyze the impact from several factors on the forward premium. The spot price, and the deviation of water inflow from its usual level, positively affect the forward premium. The variance of the spot price also has a positive effect on the forward premium, but only for the contract closest to delivery.     

股指期货市场操纵与价格发现功能的关系研究

股指期货市场操纵会影响股指期货市场的价格发现功能,同样地,股指期货市场的价格发现功能也会影响股指期货市场的操纵行为。本文在理论探讨的基础上,利用股指期货主力合约及对应的沪深300指数高频数据对市场操纵行为进行实证分析。研究结果表明,当操纵嫌疑只存在于期货市场时,股指期货市场的价格发现功能将会减弱;当操纵嫌疑存在于期货、现货两个市场时,股指期货市场的价格发现功能相对会增强。而且,当股指期货市场价格发现功能较强时,市场操纵的难度和成本都将下降。当前中国股指期货市场的操纵行为可能主要局限于某些个别的、离散的交易日内,系统地通过操纵现货指数来操纵期货市场的可能性较低。     

Smiles, Bid‐ask Spreads and Option Pricing

Given the evidence provided by Longstaff (1995), and Peña, Rubio and Serna (1999) a serious candidate to explain the pronounced pattern of volatility estimates across exercise prices might be related to liquidity costs. Using all calls and puts transacted between 16:00 and 16:45 on the Spanish IBEX‐35 index futures from January 1994 to October 1998 we extend previous papers to study the influence of liquidity costs, as proxied by the relative bid‐ask spread, on the pricing of options. Surprisingly, alternative parametric option pricing models incorporating the bid‐ask spread seem to perform poorly relative to Black‐Scholes.     

Modelling International Price Relationships and Interdependencies Between the Stock Index and Stock Index Futures Markets of Three EU Countries: A Multivariate Analysis

This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot‐futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR‐EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead‐lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification.     

Prospect theory and the effectiveness of price limits

Assuming that traders are risk-neutral, Brennan (1986) shows that price limits are effective in improving the efficiency of futures contracts with limited accessibility to information because they obscure the exact loss when they are triggered. However, Brennan's (1986) model fails to explain why price limits also exist in contracts with abundant information like those of financial futures. We show that when traders are loss-averse, the effectiveness of price limits is strengthened even in the presence of precise information. Thus, our analysis provides a theoretical foundation explaining why price limits can be useful when market participants are not fully rational.     

Trading activity and price discovery in Bitcoin futures markets

This study examines the impact of trading activities on price discovery in the Bitcoin futures markets. We find that trades of hedgers are positively correlated with the modified information shares in both CME and CBOE futures markets, suggesting that their trading promotes futures market efficiency. Retailers’ trading activity relates negatively to the price discovery of the CME Bitcoin futures and thus destabilizes the market. Speculators exert positive (negative) impact on the price discovery in the CME (CBOE) Bitcoin futures. Our finding that CME’s Bitcoin futures exhibit superior price discovery than CBOE’s provides plausible justification for CBOE’s decision in March 2019 to suspend further listings of Bitcoin futures contracts.     

Futures-Style Options on Euro-deposit Futures: Nihil sub Sole Novi?

Euro-deposit futures play a relevant role among the derivative products traded in official markets. As opposed to most futures contracts, the underlying instrument is not represented by a traded asset but by a linear transformation of an interest rate, the Libor. The options written on Euro-deposit futures that are traded at the London International Financial Futures & Options Exchange (LIFFE) are subject to daily marking to market, as the underlying futures; thus, they are called futures-style options or pure futures options. These options are often priced with the Black (1976) formula, whose use entails several shortcomings. A more realistic alternative is represented by the univariate Cox, Ingersoll and Ross (1985) model. The closed-form solutions for the prices of Euro-deposit futures and futures-style options on Euro-deposit futures obtained in the CIR model are two major original contributions presented in this paper. Other original contributions involve the determination of the relation between futures rates and forward rates and the derivation of the equivalent portfolio for the hedging of futures-style options on Euro-deposit futures.     

Managements' views on share buy‐backs: an Australian survey

Share buy‐backs are a relatively new concept in the Australian business environment. This study surveys managements' motivations and various other aspects concerning share buy‐back activity. The results reveal that these motivations vary across the five different types of buy‐backs. For on‐market buy‐backs the most relevant motivations are to improve financial performance (i.e., earnings per share) and financial position (i.e., net asset backing per share) followed by signalling of future expectations or underpricing. Interestingly, managements' response regarding the relevant motivations is similar regardless of whether their companies had conducted a buy‐back or not. This provides evidence of widespread support for the relevant motivations. In addition, Australian managers believe that they are familiar with the potential benefits and legislative requirements of buy‐backs, but that their shareholders often do not understand or are not favourably disposed towards buy‐back events. Finally, two major explanations are identified for the initial conservatism towards buy‐backs. Those explanations are (i) legal complexity and cost and (ii) the perceived negative disposition of the sharemarket towards buy‐backs.