Information transmission in informationally linked markets: Evidence from US and Chinese commodity futures markets

This paper investigates information transmission and price discovery in informationally linked markets within the multivariate generalized autoregressive conditional heteroskedasticity and information share frameworks. Based on both synchronous and non-synchronous trading information from Chinese futures/spot markets, the New York Mercantile Exchange (NYMEX), Chicago Board of Trade (CBOT), and CME Globex futures markets for copper and soybeans, we show that there is a bidirectional relationship in terms of price and volatility spillovers between US and Chinese markets, with a stronger effect from US to Chinese markets than the other way around. Additionally, the NYMEX and CBOT play a more important role than the CME Globex in the flow of information from US to Chinese markets. Moreover, we find that Chinese copper market adjusts more quickly than the NYMEX copper market to correct the disparity between both markets. However, the converse is true in the case of soybeans. Finally, our results highlight the remarkable role of Chinese futures markets in the price formation process, though NYMEX and CBOT futures markets are the main driving force in price discovery.     

Intraday Empirical Regularities in Interest Rate and Equity Index Futures Markets, and the Effect of Macroeconomic Announcements

This paper focuses on the intraday behaviour of returns, volatility, volume and price reversals for the Short Sterling interest rate and FTSE100 stock index futures contracts traded on the London International Financial Futures and Options Exchange (LIFFE). It also examines the effect of scheduled macroeconomic announcements and interest rate changes on the intraday behaviour of the variables of interest. We find clear differences and similarities with US studies and between the interest rate and equity contracts, which have important theoretical implications. This new evidence helps discriminate between the theories seeking to explain these intraday patterns.     

论巨灾期货及其市场演进

巨灾期货是一种以巨灾损失相关指数为标的物的期货合约.从1992年ISO指数巨灾期货的兴起,再到1995年被PCS巨灾指数期权的所取代,以及后来2007年CME飓风期货的最新推出可以看出一种巨灾期货的市场发展是一个不断尝试,逐步完善的过程.其市场演进呈现出四个趋势:标的指数的被人为操纵可能性降低、更新速度加快、道德风险与信息不对称问题减少、基差风险降低.     

Stock market closure and intraday stock index futures market volatility: “contagion”, bid–ask bias or both?

Chang et al. [Journal of Business 68 (1) (1995) 61] examine the impact of the closure of the New York Stock Exchange (NYSE) on S&P500 stock index futures traded on the Chicago Mercantile Exchange. They document a decline in futures market volatility immediately after the close of the NYSE, and an increase 15 minutes later when the futures market closes. They attribute this to contagion–i.e. a decline in information transfer from equities to futures markets following the closure of the underlying market. This paper examines the impact of the extension of trading hours in Hang Seng Index futures traded on the Hong Kong Futures Exchange on the 20 November, 1998 to 15 minutes after the close of the underlying market (the Stock Exchange of Hong Kong). Using the unique natural experiment provided by this change, a pattern similar to US markets is documented for the Hang Seng Index Futures following the change in trading hours. This provides strong evidence that the intraday pattern in volatility is caused by market closure. Unlike US futures exchanges, price reporters on the floor of the Hong Kong Futures Exchange collect quote data in addition to trade data. This data facilitates a test of another plausible microstructure explanation for the observed behaviour–bid–ask bounce associated with trading activity. This paper provides evidence that bid–ask bounce also explains part of the observed intraday behaviour in price volatility.     

Volatility in the foreign currency futures market

We examine the volatility implications of around-the-clock foreignexchange trading with transaction data on futures contractsfrom the Chicago Mercantile Exchange and the London InternationalFinancial Futures Exchange. We find higher U.S.-European andU.S.-Japanese exchange-rate volatilities during U.S. tradinghours and higher European cross-rate volatilities during Europeantrading hours. While the disclosure of private information throughtrading may partly explain these volatility patterns, we concludethat the increased volatility is more likely driven by macroeconomicnews announcements. An analysis of inter- and intraday dataalso reveals that volatility increases at times that coincidewith the release of U.S. macroeconomic news.     

News announcements and price discovery in foreign exchange spot and futures markets

This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.     

Which market dominates the price discovery in currency futures? The case of the Chicago Mercantile Exchange and the Intercontinental Exchange

This paper examines the relative contributions to the price discovery process of EUR/USD futures traded in the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). We find that the CME contributes 66.4%, 92.7%, and 97.3% to the price discovery process according to information share metrics suggested by Harris, McInish, and Wood (2002), Hasbrouck (1995), and Putninš (2013), respectively. The intraday information share metrics also show that the CME dominates the price discovery in most time periods. We attribute the CME's price discovery leadership to its higher trading activity, lower transaction costs, and higher volatility as compared to the ICE.     

Information transmission and causality in the Italian Treasury bond market

We examine causality and efficiency in the Italian T-bond market, where cash trades take place on the domestic Mercato Telematico dei Titoli di Stato, while futures trading is based on the London International Financial Futures Exchange. We find evidence that causality in prices runs in both directions, and that the cash lead is almost comparable in size and extension to the futures lead. We then try to assess whether the cash market is weak-form efficient with respect to LIFFE prices. Using a simple trading rule with a variety of time and price filters, we conclude that the observed lead cannot be exploited to make a profit after transaction costs.     

A note on execution costs for stock index futures: Information versus liquidity effects

This paper examines execution costs and the impact of trade size for stock index futures using price-volume transaction data from the London International Financial Futures and Options Exchange. Consistent with Subrahmanyam [Rev. Financ. Stud. 4 (1991) 17] we find that effective half spreads in the stock index futures market are small compared to stock markets, and that trades in stock index futures have only a small permanent price impact. This result is important as it helps to better understand the success of equity index products such as index futures and Exchange Traded Funds. We also find that there is no asymmetry in the post-trade price reaction between purchases and sales for stock index futures across various trade sizes. This result is consistent with the conjecture in Chan and Lakonishok [J. Financ. Econ. 33 (1993) 173] that the asymmetry surrounding block trades in stock markets is due to the high cost of short selling and the general reluctance of traders to short sell on stock markets.     

The intraday determination of liquidity in the NYSE LIFFE equity option markets

We exploit an extensive high-frequency data set of all individual equity options trading at New York Stock Exchange London International Financial Futures and Options Exchange (Amsterdam, London and Paris) in order to study the determination of liquidity during the trading day. In particular, we focus on two main aspects of option liquidity: (i) the intraday behaviour of equity option liquidity and its determinants and (ii) the influence of macroeconomic events and commonality on intraday equity option liquidity. Inventory management models cannot explain the intraday variation in option spreads and depths. Instead, we show that the option liquidity measures are strongly correlated with option volatility. Increases in volatility are associated with decreases in liquidity, a finding that is in line with information asymmetry models and the derivatives hedging theory. However, the relationship between spreads and volume varies across the three markets. Option liquidity reacts strongly to macroeconomic news announcements, especially US events. The average systematic liquidity component is 12% for Amsterdam, 14% for London and 16% for Paris.     

Using high, low, open, and closing prices to estimate the effects of cash settlement on futures prices

Due to dwindling commercial interest in the feeder cattle futures contract, the Chicago Mercantile Exchange (CME) decided to replace the contract's physical delivery provision with a cash settlement provision, arguing that cash settlement would help reduce price volatility and attracts more commercial interests. In this article, we apply stochastic volatility models to investigate the CME conjecture, using four different estimators based on opening, high, low, and closing prices, respectively. With each estimator, we find that the volatility of the feeder cattle futures price decreases after the implementation of cash settlement. We conclude that the change in the contract specification enhances price discovery and the contract's hedging performance.     

Life in the pits: competitive market making and inventory control—further Australian evidence

Manaster and Mann (1996) (herein M&M96) analyse local trading activity on the Chicago Mercantile Exchange and demonstrate, in direct contradiction to inventory control models, that locals with longer (shorter) inventory positions typically trade at higher (lower) bid and ask prices than other locals. M&M96 had a weakness in their data-set that compromised their ability to accurately track locals inventory positions. The tests developed by M&M96 are replicated using a data-set for Share Price Index (SPI) futures contract traded on Sydney Futures Exchange (SFE) which overcomes the weaknesses in M&M96. Consistent with M&M96, the evidence provided in this study challenges received inventory control models.     

Studies of the 1987 stock market crash: Review and appraisal

Within four months of the stock market crash on October 19, 1987, there were six studies of what happened. The Brady Commission, the Commodity Futures Trading Commission, the Securities and Exchange Commission, the General Accounting Office, the New York Stock Exchange, and the Chicago Mercantile Exchange all produced reports that described and analyzed the Crash, and in some cases made recommendations for additional regulation. This paper examines the conclusions and analyses contained in these reports and provides a summary of their recommendations. Particular attention is given to the allegation that stock index futures trading was a significant factor in the Crash. In addition, the recommendations that higher margins be imposed on futures transactions and that formal trading halts be instituted in both the futures and stock markets are discussed in depth. A major conclusion of this review is that new market-making procedures are needed to cope with the growing institutionalization of trading in equity and equity-derivative markets. Columbia University     

Activity in futures: does underlying market size relate to futures trading volume?

This study investigates the determinants of trading volume in the futures markets and focuses on underlying market characteristics as an explanation for futures trading volume. Four major futures contracts traded on the Sydney Futures Exchange are investigated: the stock price index (SPI); the 90-day bank accepted bill (BAB); the 3-year bond; and the 10-year bond. An important outcome of this study is an identification of the fundamental drivers of trading volume in the futures markets, which have largely gone undocumented in prior research. We find evidence that futures trading volume is related to underlying market characteristics: the size of the Australian superannuation fund investments in equities (for the SPI), short term treasury notes (for the BAB), non-government bonds on issue (for the 3-year contract) and government bonds on issue (for the 10-year contract).     

上海期货交易所金属铜国际定价能力研究

近年来,上海期货交易所作为金属铜的三大国际期货交易市场之一,市场机制日渐成熟,价格发现功能日益增强,但其国际定价能力到底有多大,与伦敦金属交易所和纽约商业交易所的联动关系如何,逐渐受到国际市场关注。本文借助计量分析方法,在相关系数、协整关系、Granger成因、方差分解等方面研究三大交易所铜期货价格之间的相互联系。实证结果表明,伦敦金属期货交易所铜期货的国际定价能力居第一位,上海期货交易所铜期货的国际定价能力在2005年我国汇率制度改革后超越纽约商业交易所居第二位,上海市场期铜价格对其他两大期货市场存在显著的影响力。     

A Tale of Two Index Futures: The Intraday Price Discovery and Volatility Transmission Processes Between the China Financial Futures Exchange and the Singapore Exchange

This is the first study to examine the intraday price discovery and volatility transmission processes between the Singapore Exchange and the China Financial Futures Exchange. Using one- and five-minute high-frequency data from May to November 2011, the authors find that the Chinese Securities Index 300 index futures dominate Singapore's A50 index futures in both intraday price discovery and intraday volatility transmission. However, A50 futures contracts also make a substantial contribution (26-37 percent) to the price discovery process. These results have important implications for both traders and policymakers.     

Optimal futures hedging under jump switching dynamics

The article develops a Markov regime switching Generalized Orthogonal GARCH model with conditional jump dynamics (JSGO) for optimal futures hedging. To the author's knowledge, there is no existing study on dynamic futures hedging investigating both the effects of regime switching and conditional jumps. This might be the fact that there is no existing hedging model encompassing both of these features. The JSGO solves this problem by introducing a jump switching filtering algorithm to infer ex post both the distributions of jumps and state variables and a recombining procedure to solve the path-dependency problem. To justify the usefulness of the JSGO on dynamic futures hedging, hedging exercises are performed using FTSE 100 futures data traded in the London International Financial Futures and Options Exchange (LIFFE). JSGO exhibits good out-of-sample performance compared to its jump-free and state-independent counterparts in terms of both criteria of variance reductions and utility improvements.     

Pricing rainfall futures at the CME

Many business people such as farmers and financial investors are affected by indirect losses caused by scarce or abundant rainfall. Because of the high potential of insuring rainfall risk, the Chicago Mercantile Exchange (CME) began trading rainfall derivatives in 2011. Compared to temperature derivatives, however, pricing rainfall derivatives is more difficult. In this article, we propose to model rainfall indices via a flexible type of distribution, namely the normal-inverse Gaussian distribution, which captures asymmetries and heavy-tail behaviour. The prices of rainfall futures are computed by employing the Esscher transform, a well-known tool in actuarial science. This approach is flexible enough to price any rainfall contract and to adjust theoretical prices to market prices by using the calibrated market price of risk. The empirical analysis is conducted with US precipitation data and CME futures data providing first results on the market price of risk for rainfall derivatives.     

Order Imbalance in the FTSE Index Futures Market: Electronic versus Open Outcry Trading

Abstract:  This study examines trading activities before and after the transfer of the FTSE 100 index futures contract from open outcry to electronic trading. Daily order imbalance exhibits strong serial persistence in the electronic limit order market, but not in open-outcry trading. Both excess buying and selling reduce liquidity. In the electronic venue, prior market movements barely affect investors' buying or selling decisions. Excess buy orders do not generate any price impact, but sell orders do. Positive imbalances are more strongly autocorrelated than negative imbalances. No trading elements, such as order imbalance, volume, or open interest, are associated with volatility. Moreover, excess buying decreases volatility. Such evidence suggests that the development and growth of electronic trading has changed the dynamics of trading activities in many important ways.     

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.