The forward pricing function of the shipping freight futures market

This article investigates the unbiasedness hypothesis of futures prices in the freight futures market. Being the only market whose underlying asset is a service, it sets it apart from other markets investigated so far in the literature. Cointegration techniques, employed to examine this hypothesis, indicate that futures prices one and two months before maturity are unbiased forecasts of the realized spot prices, whereas a bias exists in the three-months futures prices. This mixed evidence is in agreement with studies in other markets and suggests that the acceptance or rejection of unbiasedness depends on the idiosyncrasies of the market under investigation and on the time to maturity of the contract. Despite the existence of a bias in the three-months prices, futures prices for all maturities are found to provide forecasts of the realized spot prices that are superior to forecasts generated from error correction, ARIMA, exponential smoothing, and random walk models. Hence it appears that users of the BIFFEX market receive accurate signals from the futures prices (regarding the future course of cash prices) and can use the information generated by these prices to guide their physical market decisions. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 353–376, 1999     

Futures hedging when the structure of the underlying asset changes: The case of the BIFFEX contract

This article is concerned with the hedging effectiveness of futures contracts whose underlying asset is an index, when the structure of this index is changing. The case of the freight futures (BIFFEX) contract is examined here. Investigation of this issue is particularly interesting as the composition of its underlying asset, the Baltic Freight Index (BFI), has been revised on a number of occasions in order to improve the hedging performance of the market; previous empirical evidence on the market indicates substantially lower variance reduction (4–19%), compared to other markets (up to 98%). The BFI is a weighted average dry‐cargo freight rate index, compiled from actual freight rates on 11 shipping routes that are dissimilar in terms of vessel sizes and transported commodities. The hedging effectiveness of the market is investigated using both constant and time‐varying hedge ratios, estimated through bivariate error correction GARCH models. Our results indicate that the effectiveness of the BIFFEX contract as a centre for risk management has strengthened over the recent years as a result of the more homogeneous composition of the index. This by itself indicates that the latest restructuring of the index, in November 1999, which is aimed at increasing its homogeneity even further, is likely to have a beneficial impact on the market. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:775–801, 2000     

Approximation for convenience yield in commodity futures pricing

The pricing of commodity futures contracts is important both for professionals and academics. It is often argued that futures prices include a convenience yield, and this article uses a simple trading strategy to approximate the impact of convenience yields. The approximation requires only three variables—underlying asset price volatility, futures contract price volatility, and the futures contract time to maturity. The approximation is tested using spot and futures prices from the London Metals Exchange contracts for copper, lead, and zinc with quarterly observations drawn from a 25‐year period from 1975 to 2000. Matching Euro‐Market interest rates are used to estimate the risk‐free rate. The convenience yield approximation is both statistically and economically important in explaining variation between the futures price and the spot price after adjustment for interest rates. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1005–1017, 2002     

中国小麦期货市场效率的协整检验

本文采用扩展恩格尔-格朗杰检验对中国小麦期货市场效率进行研究,结果显示:未来现货价格与距最后交易日前第7、14、28天期货价格协整,并且距最后交易日越近,期货价格越接近对未来现货价格的无偏估计,期货市场接近有效率市场;未来现货价格与距最后交易日前第56天的期货价格不协整,因此可推断距最后交易日超过56天的期货市场没有效率。     

Asset storability and price discovery in commodity futures markets: A new look

This article examines the price discovery performance of futures markets for storable and nonstorable commodities in the long run, allowing for the compounding factor of stochastic interest rates. The evidence shows that asset storability does not affect the existence of cointegration between cash and futures prices and the usefulness of future markets in predicting future cash prices. However, it may affect the magnitude of bias of futures markets’ estimates (or predictions) for future cash prices. These findings have several important implications for commodity production decision making, commodity hedging, and commodity price forecasting. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:279–300, 2001     

Market efficiency among futures with different maturities: Evidence from the crude oil futures market

Although many studies have investigated market efficiency of spot and futures prices, that among futures with different maturities has not been studied extensively. In this study, market efficiency and unbiasedness among such futures are defined and the concept of “consistently efficient (or consistently efficient and unbiased) market within n‐month maturity” is introduced. According to this definition, market efficiency and unbiasedness among WTI futures with different maturities are tested using cointegration analysis, and short‐term market efficiency, using an error correction model and GARCH‐M‐ECM. The results show that WTI futures are consistently efficient within 8‐month maturity and consistently efficient and unbiased within 2‐month maturity. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:487–501, 2011     

An analysis of the failed municipal bond and note futures contracts

This study analyzes the failure of the municipal bond and municipal note futures contracts. The municipal bond contract is shown to have been the most effective hedge in the municipal market over its tenure. Changes in volume in the municipal bond contract were closely related to changes in the volume in the U.S. Treasury bond futures contract, the spot–municipal‐over‐bonds (MOB) ratio, and visible supply. The failure of the municipal bond contract is mainly attributed to a decrease in trading volume in the U.S. Treasury futures market. This was impacted by the onset of electronic trading, which the municipal futures market was reluctant to embrace. The municipal note contract was a less effective hedge than U.S. Treasury note futures and ten‐year London Interbank Offered Rate swaps. The failure of the municipal note futures contract is attributed to the existence of well‐established alternative hedges, and segmentation in the municipal market. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:656–679, 2008     

Why do expiring futures and cash prices diverge for grain markets?

In recent years, cash and futures prices have failed to converge at expiration for selected corn, soybean, and wheat commodity contracts. This lack of convergence raises questions about the effectiveness of arbitrage activities, and increases concerns about the usefulness of these contracts for hedging. We describe the delivery process for these contracts, and show that it embeds a valuable real option on the long side—the option to exchange the deliverable for another futures contract. As the relative volatility of cash and futures prices increases, this option increases in value, which disconnects the cash market from the deliverable instrument in a futures contract. Our estimates of this option's value show that it may create significant price divergence. We parameterize an option pricing model using data on these three commodities from 2000 to 2008 and show that the option model fits closely to recent episodes of non‐convergence, which lends support to the importance of real option effects. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

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Causality in the VIX futures market

This study examines the price‐discovery function and information efficiency of a fast growing volatility futures market: the Chicago Board of Option Exchange VIX futures market. A linear Engle–Granger cointegration test with an error correction mechanism (ECM) shows that during the full sample period, VIX futures prices lead spot VIX index, which implies that the VIX futures market has some price‐discovery function. But a modified Baek and Brock nonlinear Granger test detects bi‐directional causality between VIX and VIX futures prices, suggesting that both spot and futures prices react simultaneously to new information. Quarter‐by‐quarter investigations show that, on average, the estimated parameters are not significantly different from zero, thus providing further evidence supporting information efficiency in the VIX futures market. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

A No‐Arbitrage Fractional Cointegration Model for Futures and Spot Daily Ranges

The no‐arbitrage relation between futures and spot prices implies an analogous relation between futures and spot daily ranges. The long‐memory features of the range‐based volatility estimators are analyzed, and fractional cointegration is tested in a semi‐parametric framework. In particular, the no‐arbitrage condition is used to derive a long‐run relationship between volatility measures and to justify the use of a fractional vector error correction model (FVECM) to study their dynamic relationship. The out‐of‐sample forecasting superiority of FVECM, with respect to alternative models, is documented. The results highlight the importance of incorporating the long‐run equilibrium in volatilities to obtain better forecasts, given the information content in the volatility of futures prices. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 33:77–102, 2013     

Is the Australian wool futures market efficient as a predictor of spot prices?

Giles and Goss (1980) have suggested that, if a futures market provides a forward pricing function, then it is an efficient market. In this article a simple test for whether the Australian Wool Futures market is efficient is proposed. The test is based on applying cointegration techniques to test the Law of One Price over a three, six, nine, and twelve month spread of futures prices. We found that the futures market is efficient for up to a six-month spread, but no further into the future. Because futures market prices can be used to predict spot prices up to six months in advance, woolgrowers can use the futures price to assess when they market their clip, but not for longer-term production planning decisions. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 565–582, 1999     

Forecasting oil price movements: Exploiting the information in the futures market

Relying on the cost of carry model, the long‐run relationship between spot and futures prices is investigated and the information implied in these cointegrating relationships is used to forecast out of sample oil spot and futures price movements. To forecast oil price movements, a vector error correction model (VECM) is employed, where the deviations from the long‐run relationships between spot and futures prices constitute the equilibrium error. To evaluate forecasting performance, the random walk model (RWM) is used as a benchmark. It was found that (a) in‐sample, the information in the futures market can explain a sizable portion of oil price movements; and (b) out‐of‐sample, the VECM outperforms the RWM in forecasting price movements of 1‐month futures contracts. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:34–56, 2008     

Impact of bitcoin futures on the informational efficiency of bitcoin spot market

This study examines the informational efficiency of the bitcoin spot market by evaluating the predictive power of mechanical trading rules designed to exploit price continuation. Significant return predictability is found until the introduction of bitcoin futures in December 2017. The forecasting ability of trend‐chasing trading rules declines dramatically afterwards. Although evidence suggests that the introduction of bitcoin futures has increased the informational efficiency of the bitcoin spot market, no signs of improvement in informational efficiency are found in ethereum, the second‐largest cryptocurrency—following the introduction of bitcoin futures.     

Pricing efficiency of the S&P 500 index market: Evidence from the Standard & Poor's Depositary Receipts

Standard & Poor's Depositary Receipts (SPDRs) are exchange traded securities representing a portfolio of S&P 500 stocks. They allow investors to track the spot portfolio and better engage in index arbitrage. We tested the impact of the introduction of SPDRs on the efficiency of the S&P 500 index market. Ex‐post pricing efficiency and ex‐ante arbitrage profit between SPDRs and futures were also examined. We found an improved efficiency in the S&P 500 index market after the start of SPDRs trading. Specifically, the frequency and length of lower boundary violations have declined since SPDRs began trading. This result is consistent with the hypothesis that SPDRs facilitate short arbitrage by simplifying the process of shorting the cash index against futures. Tests of pricing efficiency comparing SPDRs and futures suggested that index arbitrage using SPDRs as a substitute for program trading in general results in losses. Although short arbitrages earn a small profit on average, gains are statistically insignificant. A trade‐by‐trade investigation showed that prices are instantaneously corrected after the presence of mispricing signals, introducing substantial risk in arbitraging. Evidence in general supported pricing efficiency between SPDRs and the S&P 500 index futures—both ex‐post and ex‐ante. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:877–900, 2002     

The limits to stock index arbitrage: Examining S&P 500 futures and SPDRS

This study examines factors affecting stock index spot versus futures pricing and arbitrage opportunities by using the S&P 500 cash index and the S&P 500 Standard and Poor's Depository Receipt (SPDR) Exchange‐Traded Fund (ETF) as “underlying cash assets.” Potential limits to arbitrage when using the cash index are the staleness of the underlying cash index, trading costs, liquidity (volume) issues of the underlying assets, the existence of sufficient time to execute profitable arbitrage transactions, short sale restrictions, and the extent to which volatility affects mispricing. Alternatively, using the SPDR ETF as the underlying asset mitigates staleness and trading cost problems as well as the effects of volatility associated with the staleness of the cash index. Minute‐by‐minute prices are compared over different volatility levels to determine how these factors affect the limits of S&P 500 futures arbitrage. Employing the SPDR as the cash asset examines whether a liquid tradable single asset with low trading costs can be used for pricing and arbitrage purposes. The analysis examines how long mispricing lasts, the impact of volatility on mispricing, and whether sufficient volume exists to implement arbitrage. The minute‐by‐minute liquidity of the futures market is examined using a new transaction volume futures database. The results show that mispricings exist regardless of the choice of the underlying cash asset, with more negative mispricings for the SPDR relative to the S&P 500 cash index. Furthermore, mispricings are more frequent in high‐ and mid‐volatility months than in low‐volatility months and are associated with higher volume during high‐volatility months. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1182–1205, 2008     

The effect of futures trading on the distribution of spot index returns: Implications for CVaR in the Spanish market

There is extensive empirical research on the potential destabilizing effects of futures trading activity on spot market volatility. Rather than just focusing on spot volatility, the authors deal with the contemporaneous relationship between futures trading volume and the overall probability distribution of spot market returns. Empirical evidence using intraday data from the Spanish stock index futures market over the period 2000–2002 is provided. Their findings reveal that the density function of spot return conditional to spot volume depends on unexpected futures trading volume.     

A further investigation of the lead–lag relationship between the spot market and stock index futures: Early evidence from Korea

In this article, we investigate possible lead and lag relationship in returns and volatilities between cash and futures markets in Korea. Utilizing intraday data from the newly established futures market in Korea, we find that the futures market leads the cash market by as long as 30 minutes. This result is consistent with previous studies for the U.S. and other countries’ futures markets. With regard to volatility interaction between spot and futures markets, we find that, unlike the above results for returns, a bidirectional causality is more prevalent between cash and futures markets, and this relationship is entirely sample dependent. We also find that the trading volume has significant explanatory power for volatility changes in both spot and futures markets. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 217–232, 1999     

Arbitrage,cointegration, and the joint dynamics of prices across discrete commodity futures auctions

Underlying the search for arbitrage opportunities across commodity futures markets that differ in market structure is the idea that the futures prices for similar commodities that are traded on different exchanges adjusted for differences in currency, delivery time (if any), location, and market structure are equal. This article examines price linkages in competing discrete commodity futures auction markets. We find no evidence of cointegration of futures prices of similar commodities traded on two contemporaneous discrete auction futures exchanges in Asia. We also find no evidence of arbitrage activities across these two Asian exchanges, though this does not preclude arbitrage activities with North American continuous auction markets. This lack of cointegration may be due to nonstationarities in the trading cost component. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 799–815, 1999     

Price discovery in the foreign exchange futures market

Examination is made of the relative contributions to price discovery of the floor and electronically traded euro FX and Japanese yen futures markets and the corresponding retail on‐line foreign exchange spot markets. GLOBEX electronic futures contracts provide the most price discovery in the euro; the on‐line trading spot market provides the most in the Japanese yen. The floor‐traded futures markets contribute the least to price discovery in both the euro and the Japanese yen markets. The overall results show that electronic trading platforms facilitate price discovery more efficiently than floor trading. Futures traders may also extract information from on‐line spot prices. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1131–1143, 2006     

Testing the rate forecasting consistency of major foreign currency futures

This paper examines the forecasting accuracy of currency futures markets in Canadian Dollars, British Pounds, Japanese Yen, German Marks, and Swiss Francs in predicting the actual spot rates that will exist in the spot market for these currencies. A second objective is to determine if the accuracy of the forecast is related to the time to maturity of the currency futures contract relative to the actual spot rate for that currency. The results indicate that the currency futures market appears to be a reasonably good forecaster of future currency spot rates.