The behavior and performance of major types of futures traders

This article examines the behavior and performance of speculators and hedgers in 15 U.S. futures markets. We find that after controlling for market risk factors, speculators are contrarians, but respond positively to market sentiment. In contrast, hedgers engage in positive feedback trading and trade against market sentiment. We also find that trades of speculators (hedgers) are positively (negatively) correlated with subsequent abnormal returns; however, it does not appear that speculators possess superior forecasting power. Therefore, hedging pressure effects likely explain the negative relation between the performance of speculators and hedgers. The positive feedback trading by hedgers together with their negative performance suggests that hedgers have a destabilizing impact on futures prices. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1–31, 2003     

Sentiment-dependent impact of funding liquidity shocks on futures market liquidity

We examine the effect of funding liquidity changes on futures market liquidity, depending on economic sentiment. Futures market liquidity improves following negative funding liquidity shocks, and economic sentiment is an important determinant explaining this relationship. While individuals' trading is most significantly affected by sentiment, its response to funding liquidity shocks remains independent of sentiment effects. Domestic institutions' reactions depend on the sentiment regime; they trade futures contracts more actively as funding liquidity becomes more abundant (scarcer) when sentiment is more pessimistic (optimistic). Foreigners, following negative funding liquidity shocks, generally increase their futures trading, whereas their trading decreases under the extremely pessimistic sentiment. Domestic banks and pension funds provide liquidity to the futures market even when sentiment is pessimistic.     

Risk,Uncertainty and Exchange Rate Behavior in South Africa

This study investigates the role of market sentiment and foreign policy uncertainty in explaining rand price fluctuations using monthly data from 1995M2 to 2017M8. Empirical results from the pair copula analysis indicate no dependence between foreign policy uncertainties and rand returns when market sentiment is controlled for. Furthermore, change in market sentiment seems to drive fluctuations in rand exchange rate suggesting that exchange rate behavior is indeed unpredictable as market sentiment captures both risk and uncertainty. These results are robust across pre- and post-recent financial crisis periods; hence confirming the ability of pair copula to model extreme events.     

Momentum Strategies and Investor Sentiment in the REIT Market

Comparing across three momentum measures, we empirically find that the 52‐week high strategy plays a dominant role in generating momentum profits in the Real Estate Investment Trust (REIT) market. The profitability of the 52‐week high strategy, however, varies with the state of investor sentiment. Specifically, we find that the 52‐week high momentum earns significantly positive returns following optimistic periods and significantly negative returns following pessimistic periods. Further evidence indicates that investor sentiment serves as a better predictive variable in explaining the REIT momentum than market states, business cycles, legislation changes, and monetary policy changes. Overall, our findings are in line with behavioral theories in explaining the REIT momentum.     

The determinants of price discovery on bitcoin markets

This paper investigates whether market quality, uncertainty, investor sentiment and attention, and macroeconomic news affect bitcoin price discovery in spot and futures markets. Over the period December 2017–March 2019, we find significant time variation in the contribution to price discovery of the two markets. Increases in price discovery are mainly driven by relative trading costs and volume, and uncertainty to a lesser extent. Additionally, medium-sized trades contain most information in terms of price discovery. Finally, higher news-based bitcoin sentiment increases the informational role of the futures market, while attention and macroeconomic news have no impact on price discovery.     

Market Reaction to Information Shocks—Does the Bloomberg and Briefing.com Survey Matter?

Bloomberg and Briefing.com provide competing forecasts for prescheduled macroeconomic announcements. This study examines the accuracy of these forecasts and market reactions to announcement surprises. Our results show that the Bloomberg survey is slightly more accurate than the Briefing.com survey. More importantly, although announcement surprises based on both surveys have a significant effect on the trading activities and returns of S&P 500 futures contracts, the Bloomberg survey subsumes the explanatory power of the Briefing.com survey. The findings suggest that on average Bloomberg forecasts are more consistent with the market consensus view. In addition, we provide evidence of asymmetric market reactions to positive versus negative announcement surprises. In particular, the market reacts strongly to inflation news in the Consumer Price Index (CPI) and Producer Price Index (PPI) announcements and negative shocks in housing price, personal spending, and retail sales.     

Does Investor Sentiment Predict the Near‐Term Returns of the Chinese Stock Market?

Recent evidence on the relationship between investor sentiment and subsequent monthly market returns in China shows that investor sentiment is a reliable momentum predictor since an increase (decrease) in investor sentiment leads to higher (lower) future returns. However, we suggest that momentum predictability of investor sentiment originates from the boom and bust period of 2006–2008 (the bubble period hereafter). The bubble period is characterized by several months of sustained optimism followed by several months of sustained pessimism, with the market consequently earning high (low) returns following high (low) sentiment months. Therefore, we find a strong positive association between investor sentiment and subsequent market returns during the bubble period. However, investor sentiment has a negligible impact on subsequent monthly market returns once we exclude the bubble period.     

The impact of crude oil inventory announcements on prices: Evidence from derivatives markets

This study examines the impact of weekly crude oil storage announcements on oil futures and options prices. We document evidence of a strong announcement day effect on both markets, and find prices to move in anticipation of the inventory surprise. Futures returns significantly decrease with positive surprises and increase with negative surprises. There is no evidence of an asymmetric impact on futures prices. Near‐the‐money options exhibit the greatest price sensitivity, and the magnitude of the price response of both futures and options declines with maturity. The results remain robust even after controlling for various macroeconomic and other storage‐related news variables.     

Asymmetric Post-Announcement Drift to Good and Bad News: Evidence from Voluntary Trading Disclosures in the Chinese Stock Market

This article investigates the post-announcement drift (PAD) of stock returns in the Chinese stock market. We use a sample of voluntary trading disclosures to test the hypothesis that an asymmetric PAD exists in a market in which managers are more likely to suppress negative news. We show that a pattern of short-term momentum and long-term reversal in returns persists for up to 250 trading days following the announcement of trading statements in the Chinese stock market. This finding is stronger for positive announcements in terms of the magnitude and the variance of stock returns. Our findings are in line with both Shin’s theoretical predictions and the credibility hypothesis, in which disclosure and asset returns are jointly determined and the adoption of a “sanitisation strategy” in information disclosure generates more volatile returns for firms issuing good news. Further, we show that the latter effect is more pronounced for firms which are partially state-owned, suggesting that they potentially receive more government support, a finding which is in line with the hypothesis that the incentive to suppress negative information is related to a country’s legal/judicial system.     

Unintended investor sentiment on bank financial products: Evidence from China

Investor sentiment on bank financial products (BFPs) is commonly overlooked. However, given the implementation of regulatory policies and the development of Internet financial market, investor sentiment on BFPs has become increasingly important in China since 2013. This paper constructs investor sentiment on BFPs, based on six proxies that reflect market liquidity, transaction status, market activity, and industry development. We contribute to the literature by finding the comovement of the investor sentiment on BFPs and the returns, and by demonstrating the spillover effects from bank financial markets to related markets from the perspective of the investor sentiment on BFPs.     

Customer satisfaction as a buffer against sentimental stock-price corrections

Previous research has shown that customer satisfaction is a market-based asset that can contribute to a firm’s value by increasing its stock-market returns, while simultaneously reducing the riskiness of these returns. This study contributes to the growing literature on the marketing–finance interface by examining the relationship between customer satisfaction and a type of risk that has not been previously studied in the marketing literature: the vulnerability of a firm’s stock price to the stock-market corrections that typically follow periods of high investor sentiment. The results show that customer satisfaction can function as a buffer against the risk of such sentimental stock-price movements and reduces their negative impact on a firm’s market value. In particular, we find that firms with higher (lower) levels of customer satisfaction exhibit smaller (greater) price corrections and higher returns after periods of high investor sentiment.     

Asymmetric effects of investor sentiment on industry stock returns: Panel data evidence

This article employs a state-of-the-art panel threshold model by allowing for regime intercepts, in order to shed new light on the asymmetric/nonlinear effects of local and global sentiments on expected industry stock returns among 11 Asian countries during the period from 1996 to 2010. Empirical evidence demonstrates that once the regime intercept is included, the asymmetric effects of global sentiment on oil & gas, financials, and health care industry returns become less under optimism, as compared with under pessimism. More critically, the positive (negative) impact of global sentiment above (under) the threshold turns significant, indicating that global optimism leads industry returns to be overvalued, while pessimism leads them to be undervalued. For local market sentiment, our results support that higher local sentiment enhances the returns of basic materials, telecommunications, and utilities industries. The empirical results confirm that the nexus of industry returns and investor sentiments is subject to change between different sentimental intervals.     

The conditional relationship between beta and returns: recent evidence from international stock markets

The risk–return relationship is one of the fundamental concepts in finance that is most important to investors and portfolio managers. Finance theory argues that the beta or systematic risk is the only relevant risk measure for investors. However, many studies have showed that betas and returns are not related empirically, no matter in domestic markets or in international stock markets. This paper examines the conditional relationship between beta and returns in international stock markets for the period from January 1991 to December 2000. After recognizing the fact that while expected returns are always positive, realized returns could be positive or negative, we find a significant positive relationship between beta and returns in up market periods (positive market excess returns) but a significant negative relationship in down market periods (negative market excess returns). The results are robust for both monthly and weekly returns and for two different proxies of the world market portfolio. Our findings indicate that beta is still a useful risk measure for portfolio managers in making optimal investment decisions.     

中国股票市场行为与投资者情绪

The relationship among stock returns, market volatilities and individual investor sentiment is an important topic in behavioral economics and finance. This paper uses a unique data set—China’s newly opened stock trading accounts to test the relationships among stock returns, volatilities and individual investor sentiment in the Chinese stock market. It is found that there is a positive relationship between shifts in sentiment and stock returns, and that shifts in sentiment are negatively correlated with market volatility, that is to say, volatility increases (decreases) when investors become more bearish (bullish).      

Time‐varying jump risk premia in stock index futures returns

This study tests the presence of time‐varying risk premia associated with extreme news events or jumps in stock index futures return. The model allows for a dynamic jump component with autoregressive jump intensity, long‐range dependence in volatility dynamics, and a volatility in mean structure separately for the normal and extreme news events. The results show significant jump risk premia in four stock market index futures returns including the DAX, FTSE, Nikkei, and S&P500 indices. Our results are robust to various specifications of conditional variance including the plain GARCH, component GARCH, and Fractionally Integrated GARCH models. We also find the time‐varying risk premium associated with normal news events is not significant across all indices. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:639–659, 2012     

Return dynamics during periods of high speculation in a thinly traded commodity market

This article studies the effects of speculation in a thinly traded commodity futures market, paying particular attention to periods characterized by high-speculative activity of long–short speculators. Using the speculation ratio as a daily measure for long–short speculation, we employ generalized autoregressive conditional heteroscedasticity regressions to study its impact on return dynamics. Our results for the Chicago Mercantile Exchange feeder cattle futures market suggest that futures returns are predominantly explained by fundamentals, but their volatility is significantly driven by the speculation ratio. This relationship holds for periods of high- and low-speculative activity alike.     

Housing market sentiment and intervention effectiveness: Evidence from China

This paper studies the interaction between housing market sentiment and government interventions. With a unique micro-level data from China, we construct a housing market sentiment index by applying the techniques in the finance literature. This index is significantly correlated with the confidence indexes from official sources. We find that housing market returns increase with contemporaneous sentiment, and high sentiment is followed by low returns. Tightening policies cannot reduce optimism, and high sentiment negatively impacts the effectiveness of tightening policies. This negative impact is especially significant in the zones where housing prices are sensitive to increasing sentiment.     

Asymmetrical reaction to US stock-return news: evidence from major stock markets based on a double-threshold model

This paper examines the hypothesis that both stock returns and volatility are asymmetrical functions of past information from the US market. By employing a double-threshold GARCH model to investigate six major index-return series, we find strong evidence supporting the asymmetrical hypothesis of stock returns. Specifically, negative news from the US market will cause a larger decline in a national stock return than an equal magnitude of good news. This holds true for the volatility series. The variance appears to be more volatile when bad news impacts the market than when good news does.     

Public News Arrival and Cross‐Asset Correlation Breakdown

This study models and tests empirically the role of public news arrivals in the quote matching across single‐stock futures and underlying stock markets—a trading strategy often adopted by algorithmic traders. Our model suggests that quote return correlation across these two markets breaks down when the news uncertainty is sufficiently large and futures market makers switch from automating the quote matching process to manually analyze, monitor, and update quotes. We show empirically that the breakdown is more prominent for large stocks, and this effect of firm size falls during periods of high‐market volatility. Our empirical results are robust to the effect of distraction due to extraneous news events.     

Do country risk and financial uncertainty matter for energy commodity futures?

Using an instrumental variable quantile regression technique, this paper assesses whether country risk and financial uncertainty exert an impact on energy commodity futures prices under different commodity conditional return distributions over the period from January 1994 to July 2017. We also discuss whether the correlations change with different dimensions of country risk, that is economic, financial, and political. The results reveal that country risk and financial stress do have a significant impact on energy commodity returns of futures contracts with different maturities, but their direction, intensity, and significance differ, caused by the distinct market situations and divergent channels of country risk.