A leader of the world commodity futures markets in the making? The case of China's commodity futures

We use the daily data of 16 commodity futures contracts traded in China and corresponding foreign markets (the US, the UK, Japan, and Malaysia) to analyze the linkages between markets. Several findings are noteworthy. First, trading returns of foreign markets, such as the US, have significant impact on China's overnight (close-to-open) returns and vice-versa. Second, daytime (open-to-close) returns of many Chinese commodity futures contracts are not led by foreign daytime returns. Finally, the close-to-close returns analysis suggests that there are no significant lead-lag relationships between the Chinese and foreign markets. These results suggest that (1) the Chinese commodity futures markets are information-efficient, and (2) they are likely to be driven by local market dynamics occurring during the daytime trading session.     

Information transfer,microstmctures and intraday price return spikes

Previous research has identified overnight public information as the cause of higher opening returns and mean reversion in security markets. This paper tests this hypothesis by using an intervention and transfer function time series model to filter out the dynamic effects of an overnight information set on the opening, and subsequent, intraday AOI stock and SPI futures intraday price returns. A further research objective was to analyse the process by which information is transferred into prices and whether there is a differential impact across stock and futures markets. It was determined that the information contained in the overnight US stock market had: (i) a differential impact on the Australian stock and futures market, and (ii) after filtering out the impact of overnight information, a significant reversal tendency remained in both markets after opening. Further analysis supported the conclusion that price spikes at opening were not wholly related to overnight information. Other possible explanations, such as different trading mechanisms, did not provide a satisfactory explanation. Overall, it appears that the uncertainty participants face at the beginning of a trading session may induce a number of subtle market reactions (both rational and irrational), in markets with different microstmctures and trading clientele.     

Transmission of Stock Returns and Volatility between the U.S. and Japan: Evidence from the Stock Index Futures Markets

In this paper, we examine the nature of transmission of stock returns and volatility between the U.S. and Japanese stock markets using futures prices on the S&P 500 and Nikkei 225 stock indexes. We use stock index futures prices to mitigate the stale quote problem found in the spot index prices and to obtain more robust results. By employing a two-step GARCH approach, we find that there are unidirectional contemporaneous return and volatility spillovers from the U.S. to Japan. Furthermore, the U.S.'s influence on Japan in returns is approximately four times as large as the other way around. Finally, our results show no significant lagged spillover effects in both returns and volatility from the Osaka market to the Chicago market, while a significant lagged volatility spillover is observed from the U.S. to Japan. This revised version was published online in August 2006 with corrections to the Cover Date.     

Beyond Basis Basics: Liquidity Demand and Deviations from the Law of One Price

Deviations from the law of one price between futures and spot prices—the futures-cash basis—capture information about liquidity demand for equity market exposure in global markets. We show that the basis comoves with dealer and investor futures positions, is contemporaneously positively correlated with futures and spot market returns, and negatively predicts futures and spot returns. These findings are consistent with the futures-cash basis reflecting liquidity demand that is common to futures and cash equity markets. We find persistent supply-demand imbalances for equity index exposure reflected in the basis, giving rise to an annual premium of 5% to 6%.     

Local and global price memory of international stock markets

The prime focus of this paper is on the impact of the world’s leading markets (USA, Japan, Hong Kong, UK, France, Switzerland and Germany) on the returns of the small Nordic markets (Denmark, Finland, Norway and Sweden). The order and the degree of processing both ‘local’ and ‘global’ information are uncovered using a combination of cointegration analysis and structural VAR modeling utilizing daily index returns. The results indicate that the US price changes, conditioned on the same day changes on the other markets, have an impact on all other markets during the following day, including the US market itself. Price changes on the Asian–Pacific markets are completely absorbed in price changes in Europe and do not have any direct effect on US prices. Finally, a cointegration relationship between Sweden and Norway is found, which affects also Finland.     

The Lead‐Lag Relationship Between Cash and Stock Index Futures in a New Market

This paper investigates the lead‐lag relationship in daily returns and volatilities between price movements of the FTSE/ATHEX‐20 and FTSE/ATHEX Mid‐40 stock index futures and the underlying cash indices in the relatively new futures market of Greece. Empirical results show that there is a bi‐directional relationship between cash and futures prices. However, futures lead the cash index returns, by responding more rapidly to economic events than stock prices. This speed is much higher in the more liquid FTSE/ATHEX‐20 market. Moreover, results indicate that futures volatilities spill information over to the corresponding cash market volatilities in both investigated futures markets, but volatilities in the cash markets have no effect on the volatilities of futures markets. Overall, it seems that new market information is disseminated faster in the futures market compared to the stock market. This implies that the futures markets can be used as price discovery vehicles, providing further evidence that derivatives markets contribute to completing and stabilising capital markets in Greece. A further finding of this study is that futures volume and disequilibrium effects between cash and futures prices are important variables in the explanation of volatilities in cash and futures markets.     

Spillovers of stock return volatility to Asian equity markets from Japan and the US

This paper examines the magnitude of return and volatility spillovers from Japan and the US to seven Asian equity markets. I construct a volatility spillover model that deals with the US shock as an exogenous variable in a bivariate EGARCH for Japan and Asian markets. First, only the influence of the US is important for Asian market returns; there is no influence from Japan. Second, the volatility of the Asian market is influenced more by the Japanese market than by the US. Third, there exists an adverse influence of volatility from the Asian market to the Japanese market.     

Impact of speculation and economic uncertainty on commodity markets

We examine the interactions between commodity futures returns and five driving factors (financial speculation, exchange rate, stock market dynamics, implied volatility for the US equity market, and economic policy uncertainty). Nonlinear causality tests are implemented after controlling for cointegration and conditional heteroscedasticity in the data over the period May 1990 – April 2014. Our results show strong evidence of unidirectional linear causality from commodity returns to excess speculation for the majority of the considered commodities, in particular for agriculture commodities. This evidence casts doubt on the claim that speculation is driving food prices. We also find unidirectional linear causality from energy futures markets to exchange rates and strong evidence of nonlinear causal dependence between commodity futures returns, on the one hand, and stock market returns and implied volatility, on the other hand. Overall, the new evidence found in this paper can be utilized for policy and investment decision-making.     

Trading activity and price reversals in futures markets

We use the standard contrarian portfolio approach to examine short-horizon return predictability in 24 US futures markets. We find strong evidence of weekly return reversals, similar to the findings from equity market studies. When interacting between past returns and lagged changes in trading activity (volume and/or open interest), we find that the profits to contrarian portfolio strategies are, on average, positively associated with lagged changes in trading volume, but negatively related to lagged changes in open interest. We also show that futures return predictability is more pronounced if interacting between past returns and lagged changes in both volume and open interest. Our results suggest that futures market overreaction exists, and both past prices and trading activity contain useful information about future market movements. These findings have implications for futures market efficiency and are useful for futures market participants, particularly commodity pool operators.     

A Note on International Portfolio Diversification with Short Selling

In this paper, the diversification benefits of using stock index futures are examined. Empirical evidence shows that traditional diversification in international equity markets does not produce a risk adjusted performance superior to the US market. An explanation for this result is that restrictions on short selling prohibit the best allocation of resources when overseas stock markets are riskier and have worse returns. However, when such restrictions are eased for short selling in index futures markets, investors are enabled to both allocate their investments more efficiently and to construct a superior portfolio.     

A Conditional Assessment of the Relationships between the Major World Bond Markets

This paper uses a bivariate GARCH framework to examine the lead‐lag relations and the conditional correlations between 10‐year US government bond returns and their counterparts from the UK, Germany, and Japan. We find that while mean and volatility spillovers exist between the major international bond markets, they are much weaker than those between equity markets. The results also indicate that the correlations between the US and other major bond market returns are time varying and are driven by changing macroeconomic and market conditions. However, in contrast to the finding that the benefits of international diversification in equity markets evaporate during high‐stress periods, we find that the benefits of diversification across major government bond markets do not decrease during periods of extremely high bond market volatility or following extremely negative US and foreign bond returns.     

The determination and international transmission of stock market volatility

This paper extends the literature on low-frequency analysis of the causes and transmission of stock market volatility. It uses end-monthly data on stock market returns, interest rates, exchange rates, inflation, and industrial production for five countries (Britain, France, Germany, Japan, and the US) from July 1973 to December 1994. Efficient portfolios of world, European, and Japanese/US equity are first constructed, the existence of multivariate cointegrating relationships between them is demonstrated, and the transmission of conditional volatility between them is described. The transmission of conditional volatility from world equity markets and national business cycle variables to national stock markets is then modeled. Among the main findings are: first, world equity market volatility is caused mostly by volatility in Japanese/US markets and transmitted to European markets, and second, changes in the volatility of inflation are associated with changes of the opposite sign in stock market volatility in all markets where a significant effect is found to exist. To the extent that the volatility of inflation is positively related to its level, this implies that low inflation tends to be associated with high stock market volatility.     

Intraday and interday volatility in the Japanese stock market

This paper characterizes the volatility in the Japanese stock market based on a 4-year sample of 5-min Nikkei 225 returns from 1994 through 1997. The intradaily volatility exhibits a doubly U-shaped pattern associated with the opening and closing of the separate morning and afternoon trading sessions on the Tokyo Stock Exchange. This feature is consistent with market microstructure theories that emphasize the role of private and asymmetric information in the price formation process. Meanwhile, readily identifiable Japanese macroeconomic news announcements explain little of the day-to-day variation in the volatility, confirming previous findings for US equity markets. Furthermore, by appropriately filtering out the strong intradaily periodic pattern, the high-frequency returns reveal the existence of important long-memory interdaily volatility dependencies. This supports recent results stressing the importance of exploiting high-frequency intraday asset prices in the study of long-run volatility properties of asset returns.     

The Halloween Effect and Japanese Equity Prices: Myth or Exploitable Anomaly

Bouman and Jacobsen (American Economic Review 92(5), 1618–1635, 2002) examine monthly stock returns for major world stock markets and conclude that returns are significantly lower during the May–October periods versus the November–April periods in 36 of 37 markets examined. They argue that, in general, the Halloween strategy outperforms the buy and hold strategy thereby casting doubt on the validity of the efficient market paradigm. More recently, Maberly and Pierce (Econ Journal Watch 1(1), 29–46, 2004) re-examine the evidence for U.S. equity prices and conclude that Bouman and Jacobsen’s results are not robust to alternative model specifications. Extending prior research, this paper examines the robustness of the Halloween strategy to alternative model specifications for Japanese equity prices. The Halloween effect is concentrated in the period prior to the introduction of Nikkei 225 index futures in September 1986. After the internationalization of Japanese financial markets in the mid-1980s, the Halloween effect disappears.JEL classification: G14, G15     

Social media and price discovery: The case of cross-listed firms

In this article, we examine whether social media information affects the price-discovery process for cross-listed companies. Using over 29 million overnight tweets mentioning cross-listed companies, we examine the role of social media for a link between the last periods of trading in the US markets and the first periods in the UK market. Our estimates suggest that the size and content of information flows on social networks support the price-discovery process. The interactions between lagged US stock features and overnight tweets significantly affect stock returns and volatility of cross-listed stocks when the UK market opens. These effects weaken and disappear 1 to 3 hr after the opening of the UK market. We also develop a profitable trading strategy based on overnight social media, and the profits remain economically significant after considering transaction costs.     

International Equity Index and Currency Futures: Commodity Currencies or Emerging Versus Developed Markets?

Equity index futures in both emerging and developing markets that are net commodity exporters are strongly linked to their respective currency futures markets. Unconditional correlations among equity and currency futures are the highest for these net basic materials producers in both emerging and developed markets. Granger causality tests also indicate that stock market returns are more strongly related to currency futures returns for commodity-exporting countries. Additionally, conditional correlations among currency and equity futures returns are the strongest for commodity-producing countries in both emerging and developed economies. Volatility spillover analysis provides consistent results. The overall results indicate that the status of a country as a net importer or exporter of raw materials is more important to the relationship between equity and currency futures than whether it is an emerging or developed economy.     

INTRADAY MARKET BEHAVIOR AND THE EXTENT OF FEEDBACK BETWEEN S&P 500 FUTURES PRICES AND THE S&P 500 INDEX

In this study we empirically examine the intraday lead/lag relation between S&P 500 futures prices and the S&P 500 index, and whether daily market characteristics are associated with changes in the relation. We estimate daily Geweke measures of feedback and regress time series of these measures on daily price volatility and volume characteristics. Results indicate that the contemporaneous price relation is substantive and that measures of contemporaneous feedback are positively associated with the daily range of the futures price. The primary implication is that the relation between cash and futures prices becomes stronger as futures price volatility increases. As volatility increases, information is being impounded at a faster rate so that futures and equity markets operate more closely as one market. Large futures price moves, by themselves, are not responsible for breakdowns in the stock-futures price relation.     

Overreaction of country ETFs to US market returns: Intraday vs. daily horizons and the role of synchronized trading

In this paper we study the intraday price formation process of country Exchange Traded Funds (ETFs). We identify specific parts of the US trading day during which Net Asset Values (NAVs), currency rates, premiums and discounts, and the S&P 500 index have special effects on ETF prices, and characterize a special intraday and overnight updating structure between these variables and country ETF prices. Our findings suggest a structural difference between synchronized and non-synchronized trading hours. While during synchronized trading hours ETF prices are mostly driven by their NAV returns, during non-synchronized trading hours the S&P 500 index has a dominant effect. This effect also exceeds the one that the S&P 500 index has on the underlying foreign indices and suggests an overreaction to US market returns when foreign markets are closed.     

Measuring equity market integration using uncorrelated information flows: Tokyo,London and New York

Equity markets do not pass all overnight information into prices instantly at the opening of trade. We adjust open-to-close return series for non-instantaneous information absorption and then use adjusted series to measure integration among three major equity markets. Because the adjusted daytime return series are uncorrelated, we can accurately measure the size, and identify the sources, of transmissions. Overnight news, as represented by foreign open-to-close returns, explains 13% of opening price variation (close-to-open returns) in New York, 14% in Tokyo and 30% in London. For New York and Tokyo, the largest influences come from the market that trades immediately prior (London and New York respectively) whereas opening price variation in London is linked closer with New York than Tokyo. Foreign volatility spillovers are also significant, and subject to asymmetric effects.     

Non-linear dynamics in international stock market returns

Recent empirical finance research has reported non-linear dynamics within asset returns. However, much of this extant research has focussed upon asset markets within the US and UK. This paper examines whether such dynamics are also present in a series of six international equity index returns. Using empirical models which are consistent that the theoretical behavioural finance noise trader motivation of non-linearity, whereby market dynamics differ between small and large returns, our results suggest these models improve the in-sample fit and out-of-sample forecast over linear alternatives. Further, the point of regime transition differs between positive and negative returns indicating that noise traders are more likely to engage in trend-chasing behaviour in up markets and anchoring behaviour in down markets. Finally, the forecast gain in the Asia-Pacific markets is greater than in the European markets suggestive that limits to arbitrage are greater perhaps as fundamental traders knowledge of market dynamics and noise trader behaviour is still evolving.