The Responses of Interest Rate Spreads to Information Releases

This study examines the responses of three popular futures interest-rate spreads--the MOB (Municipals over Treasury bonds), the NOB (Notes over Treasury bonds), and the TED (Treasury Bills over Eurodollars) to macroeconomic news. We find responses to differ across the three spreads. The most pronounced responses are displayed by the MOB, followed by the NOB and the TED. We also find that the spreads take time to adjust to news in the announcements.     

"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 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.     

Daily Changes in Fed Funds Futures Prices

This paper explores the properties of daily changes in the prices for near-term fed funds futures contracts. The paper finds these contracts to be excellent predictors of the fed funds rate, and shows that the claim of a nonzero term premium in the short-horizon contracts is more sensitive to outliers than previous research appears to have recognized. I find some statistically significant evidence of serial correlation in the daily changes, but this accounts for only a tiny part of the 1-day movements and there is essentially zero predictability for horizons longer than 1 day. Settlement futures prices for each day appear to incorporate the information embodied in that day's term structure of longer-horizon Treasury securities. Previous employment growth makes a statistically significant contribution to predicting futures price changes, though again this could only account for a tiny part of the daily variance. The paper concludes that futures prices provide a very useful measure of the daily changes in the market's expectation of near-term changes in Fed policy.     

The Quality Delivery Option in Treasury Bond Futures Contracts

This paper uses three methods to estimate quality option values for CBOT Treasury bond futures contracts. It presents evidence regarding: (1) payoffs from exercising this option at delivery, (2) estimates from a T-bond futures pricing model that incorporates this option, and (3) estimates obtained from an exchange option pricing formula. The results indicate that this option is worth considerably less than reported by Kane and Marcus (1986a) . For example, payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0.30 percentage points of par.     

The volatility effect of futures trading: Evidence from LSE traded stocks listed as individual equity futures contracts on LIFFE

This study investigates the impact of LIFFE's introduction of individual equity futures contracts on the risk characteristics of the underlying stocks trading on the LSE. We employ the Fama and French three-factor model (TFM) to measure the change in the systematic risk of the underlying stocks which arises subsequent to the introduction of futures contracts. A GJR-GARCH(1,1) specification is used to test whether the futures contract listing affects the permanent and/or the transitory component of the residual variance of returns, and a control sample methodology isolates changes in the risk components that may be caused by factors other than futures contract innovation. The observed increase (decrease) in the impact of current (old) news on the residual variance implies that futures contract listing enhances stock market efficiency. There is no evidence that futures innovation impacts on either the systematic risk or the permanent component of the residual variance of returns.     

INFLUENCE OF TREASURY BILL FUTURES TRADING ON THE PRIMARY SALE OF THE DELIVERABLE TREASURY BILL

This paper investigates the impact of the presence of Treasury bill (T-bill) futures market contracts on the primary auction price of deliverable T-bills. Of the 52 weekly three- and six-month T-bill auctions, only four are deliverable against the T-bill futures market contract. This unique ability to deliver may command a premium price in the primary market. The results of this study support this hypothesis with regard to the six-month auction but are inconclusive with regard to the three-month auction. Furthermore, there is some evidence that the 1983 rule change making the one-year T-bill a deliverable instrument reduced the size of the premium in the six-month bill auction.     

A MULTIFACTOR MODEL OF THE QUALITY OPTION IN TREASURY FUTURES CONTRACTS

The values of quality options in Treasury futures contracts are set relative to the prices of all coupon bonds in their respective deliverable sets. As a result, any model used to value the quality option should set its price relative to the set of observed bond prices. This requirement rules out the use of most simple equilibrium models that represent all bond prices in terms of a finite number of state variables. We use the two-factor Heath-Jarrow-Morton model, which permits claims to be priced relative to observable bond prices, to investigate the potential value of the quality option in Treasury bond and note futures. We show that the quality option has significantly more value in a two-factor interest rate economy than in a single-factor economy, and that ignoring it could lead to significant mispricing.     

Hedging Corporate Bonds

We examine Treasury bond and stock index futures, the swap curve and two types of hypothetical corporate bond assets as alternative hedging instruments for portfolios of corporate bonds. Conducting ex post and ex ante tests we find evidence that credit quality and maturity are important sources of basis risk when hedging corporate bonds whose credit rating are below triple A. We conclude that a new corporate hedging instrument may be useful for those wishing to hedge corporate bond portfolios provided that transaction costs are not too high relative to existing futures contracts.     

中国利率互换套期保值有效性实证研究

为了研究我国利率互换的套期保值功能,该文利用协整检验分析利率互换和国债的长期均衡关系,并通过确定套期保值比率的OLS模型和套期保值绩效的衡量指标,对利率互换的套期保值比率和绩效进行了实证研究。结果显示,我国当前利率互换和国债收益率并不存在长期均衡关系;利率互换市场尚未发挥套期保值功能,其运行效率有待进一步提高。     

Relationship Between Expected Treasury Bill and Eurodollar Interest Rates: A Fractional Cointegration Analysis

In this paper, we extend Booth and Tse's (BT)1995 analysis of fractional cointegration between theexpected Eurodollar and Treasury bill interest ratesimplied by their respective futures contracts. Thedefinition of fractional cointegration suggested byCheung and Lai (1993) and used by BT is refined sothat it requires the cointegrating relationship to bestationary as well as mean-reverting. In addition tothe Geweke and Porter-Hudak method used by BT, a moreefficient Maximum Likelihood (ML) method is used toestimate the cointegrating relationship. The LM (Engle(1982)) test indicates the possible existence of aheteroscedastic cointegrating relationship. Therefore,we use heteroscedastic models (GARCH and ExponentialGARCH) to represent the cointegrating regressioninstead of the simple homoscedastic model used by BT.The empirical evidence cannot reject the nullhypothesis of a stationary fractional cointegrationrelationship between the Eurodollar and Treasury billinterest rates.     

引入国债期货合约能否发挥现货市场稳定效应?——基于中国金融周期的研究视角

我国国债期货市场能否发挥稳定现货市场功能,金融周期风险是否会改变国债期货市场对现货市场波动的影响,是投资者实施风险管理和监管部门构建市场稳定机制的重要依据。本文通过信息传递机制和交易者行为两个维度探析国债期货市场发挥稳定功能的微观机理,分析金融周期风险对衍生工具稳定功能的影响,解析引入国债期货合约能否缓解金融周期波动对国债市场冲击,同时关注我国国债期货交易机制改进与现券波动关系。研究发现:(1)我国国债期货市场已实现抑制现货市场波动的功能,金融周期风险会引发现货价格波动,国债期货市场能够降低金融周期的波动冲击;(2)改善现货市场深度和套保交易是国债期货市场发挥稳定功能的微观路径,国债期货市场增进国债预期交易量流动性、减弱非预期交易量干扰,金融周期低波动区间套保交易稳定作用受到抑制;(3)国债期货投机交易和波动溢出效应助长现货市场波动,正负期现基差对国债波动影响具有非对称特征。     

Examining the forward pricing function of the Australian equity index futures contract

The relationship between the Australian equity index futures and spot prices is examined. Tests indicate that futures prices with one, two and three months to maturity are unbiased predictors of the spot and hence provide an efficient hedging mechanism for Australian equity index market participants, while six‐, nine‐ and twelve‐month futures prices are biased predictors of spot prices, indicating that speculative opportunities may exist in futures contracts for these time spreads. An analysis of the short‐run dynamic properties of the long‐run equilibrium relationship found that for all time spreads the futures prices respond to changes in the long‐run equilibrium, and for the twelve‐month contract, both futures and spot prices adjust to return to the long‐run equilibrium.     

Intraday Price Formation in U.S. Equity Index Markets

The market for U.S. equity indexes presently comprises floor‐traded index futures contracts, exchange‐traded funds (ETFs), electronically traded, small‐denomination futures contracts (E‐minis), and sector ETFs that decompose the S&P 500 index into component industry portfolios. This paper empirically investigates price discovery in this environment. For the S&P 500 and Nasdaq‐100 indexes, most of the price discovery occurs in the E‐mini market. For the S&P 400 MidCap index, price discovery is shared between the regular futures contract and the ETF. The S&P 500 ETF contributes markedly to price discovery in the sector ETFs, but there are only minor effects in the reverse direction.     

Implicit delivery options and optimal delivery strategies for financial futures contracts

Futures contract specification usually allow the short position some variation as to when, where, how much, and what is to be delivered. In this paper we derive the optimal delivery policy for the Treasury Bond futures contracts, and find that our policy produces profits that are positive and statistically significant. This indicates that future prices are ‘too high’ in that the short position can earn profits by skillfully exercising his delivery options. We find the actual delivery policies of market participants depart substantially from the optimal strategy. The implications of these findings for futures traders and bond dealers are discussed.     

Volatility linkages of the equity,bond and money markets: an implied volatility approach

This study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets.     

The Pre‐FOMC Announcement Drift

We document large average excess returns on U.S. equities in anticipation of monetary policy decisions made at scheduled meetings of the Federal Open Market Committee (FOMC) in the past few decades. These pre‐FOMC returns have increased over time and account for sizable fractions of total annual realized stock returns. While other major international equity indices experienced similar pre‐FOMC returns, we find no such effect in U.S. Treasury securities and money market futures. Other major U.S. macroeconomic news announcements also do not give rise to preannouncement excess equity returns. We discuss challenges in explaining these returns with standard asset pricing theory.     

Analytical bounds for Treasury bond futures prices

The pricing of delivery options, particularly timing options, in Treasury bond futures is prohibitively expensive. Recursive use of the lattice model is unavoidable for valuing such options, as Boyle in J Finance 14(1):101?C113, (1989) demonstrates. As a result, the main purpose of this study is to derive upper bounds and lower bounds for Treasury bond futures prices. This study first shows that the popular preference-free, closed form cost of carry model is an upper bound for the Treasury bond futures price. Then, the next step is to derive analytical lower bounds for the futures price under one and two-factor Cox-Ingersoll-Ross models of the term structure. The bound under the two-factor Cox-Ingersoll-Ross model is then tested empirically using weekly futures prices from January 1987 to December 2000.     

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.     

Interday variations in volume,variance and participation of large speculators

We use data uniquely available from the Commodity Futures Trading Commission (CFTC) to document the intraweek trading patterns of large speculators in five futures markets. These markets include futures traded against the Standard and Poor's 500 stock index, Treasury Bonds, gold, corn, and soybeans. We also examine the influence of large speculator trades on the patterns of volume and volatility for the contracts in our sample. Though we detect the familiar U-shaped and inverted U-shaped patterns across weekdays for volatility and aggregate volume, the association between volume and volatility becomes stronger when we separate large speculator volume from volume associated with other traders. The coefficient on large speculator volume is much larger than the coefficient on other volume in these regressions. Compared with total volume, large speculator volume is greater on Mondays than on the other days of the week in all five markets.