Is it time to reduce the minimum tick sizes of the E‐mini futures?

On the Chicago Mercantile Exchange (CME), so‐called “E‐mini” index futures contracts trade on the electronic GLOBEX trading system alongside the corresponding full‐size contracts that trade on the open outcry floor. This paper finds that the current minimum tick sizes of the E‐mini S&P 500 and E‐mini Nasdaq‐100 futures contracts act as binding constraints on the bid‐ask spreads by not allowing the spreads to decline to competitive levels. We also find that, while exchange locals trade very actively on GLOBEX, they do not tend to act as liquidity suppliers. Taken together, our empirical results suggest that it is time for the CME to consider decreasing the minimum tick sizes of the S&P 500 and Nasdaq‐100 E‐mini futures contracts. A tick size reduction is likely to result in lower trading costs in the E‐mini futures markets. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:79–104, 2005     

Price discovery and investor structure in stock index futures

Previous literature on price discovery in stock index futures and spot markets neglects the role of different investor groups. This study relates time‐varying spot‐futures linkages studied within a VECM‐DCC‐GARCH framework to changes in the investor structure of the futures market over time. Empirical results suggest that during the dominance of presumably uninformed private investors, the futures market does not contribute to price discovery. By contrast, there is evidence of information flows from futures to spot markets and a significant increase in conditional correlation between both markets as institutional investors' share in trading volume increases. We derive implications for the design of emerging futures markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark31:282–306, 2011     

Size clustering in the FTSE100 index futures market

Recent literature has begun to explore size clustering in financial markets. If a market is perfectly liquid, traders should be able to trade the exact amount that they desire; however, the presence of size clustering may prevent them from achieving optimal trade sizes. This study is novel in its investigation of size clustering in a futures market. We find that trade sizes cluster in a manner that is similar to the pattern of price clustering found in many financial markets. Importantly, we identify a trade‐off between size resolution and price resolution. We also find that the number of distinct trade sizes increases with trade frequency and with intra‐day volatility, and increases at the end of each calendar quarter. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:432–443, 2010     

Bid‐ask spreads,volatility, quote revisions,and trades of thinly traded futures contracts

We investigate intraday bid‐ask spreads (BAS), volatility, and trading activity of thinly traded equity index futures contracts on the Singapore Exchange. Contrary to previous findings, we find a rather flat BAS pattern during the trading day. However, consistent with past findings, an increase in risk widens the spread and a higher trading activity reduces it. When trading occurs in a day, spreads are reduced. No significant difference in volatility between days with and without trades was detected. When trades occur, quote revisions increase, and it is positively related to the number of trades. An increase in the number of quote revisions increases the likelihood of a transaction, and when quotes are current, revisions that are accompanied by trades carry new information. We provide evidence that contracts that are thinly traded may possess liquidity attributes as long as their price quotes remain current. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:455–486, 2003     

Price discovery and volatility spillovers in the DJIA index and futures markets

The Dow Jones Industrial Average (DJIA) is the most widely quoted stock index worldwide. This article examines the minute-by-minute price discovery process and volatility spillovers between the DJIA index and the index futures recently launched by the CBOT. The Hasbrouck (1995) cointegrating model suggests that most of the price discovery takes place at the futures market. However, by examining the volatility spillovers between the markets based on a bivariate EGARCH model, a significant bidirectional information flow is found. That is, innovations in one market can predict the future volatility in another market, but the futures market volatility-spillovers to the stock market more than vice versa. Both markets also exhibit asymmetric volatility effects, with bad news having a greater impact on volatility than good news. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 911–930, 1999     

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     

Regime‐switching in stock index and Treasury futures returns and measures of stock market stress

We investigate bivariate regime‐switching in daily futures‐contract returns for the US stock index and ten‐year Treasury notes over the crisis‐rich 1997–2005 period. We allow the return means, volatilities, and correlation to all vary across regimes. We document a striking contrast between regimes, with a high‐stress regime that exhibits a much higher stock volatility, a much lower stock–bond correlation, and a higher mean bond return. The high‐stress regime is associated with higher average values of stock‐implied volatility, stock illiquidity, and stock and bond futures trading volume. The lagged implied volatility from equity‐index options is useful in modeling the time‐varying transition probabilities of the regime‐switching process. Our findings support the notions that: (1) stock market stress can have a material influence on Treasury bond pricing, and (2) the diversification benefits of combined stock–bond holdings tend to be greater during times with relatively high stock market stress. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:753–779, 2010     

Spot‐futures spread,time‐varying correlation,and hedging with currency futures

This article investigates the effects of the spot‐futures spread on the return and risk structure in currency markets. With the use of a bivariate dynamic conditional correlation GARCH framework, evidence is found of asymmetric effects of positive and negative spreads on the return and the risk structure of spot and futures markets. The implications of the asymmetric effects on futures hedging are examined, and the performance of hedging strategies generated from a model incorporating asymmetric effects is compared with several alternative models. The in‐sample comparison results indicate that the asymmetric effect model provides the best hedging strategy for all currency markets examined, except for the Canadian dollar. Out‐of‐sample comparisons suggest that the asymmetric effect model provides the best strategy for the Australian dollar, the British pound, the deutsche mark, and the Swiss franc markets, and the symmetric effect model provides a better strategy than the asymmetric effect model in the Canadian dollar and the Japanese yen. The worst performance is given by the naïve hedging strategy for both in‐sample and out‐of‐sample comparisons in all currency markets examined. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1019–1038, 2006     

Nonlinear dynamics and competing behavioral interpretations: Evidence from intra‐day FTSE‐100 index and futures data

Extant empirical research has reported nonlinear behavior within arbitrage relationships. In this article, the authors consider potential nonlinear dynamics within FTSE‐100 index and index‐futures. Such nonlinearity can be rationalized by the existence of transactions costs or through the interaction between informed and noise traders. They consider several empirical models designed to capture these alternative dynamics. Their empirical results provide evidence of a stationary basis term, and thus cointegration between index and index‐futures, and the presence of nonlinear dynamics within that relationship. The results further suggest that noise traders typically engage in momentum trading and are more prone to this behavior type when the underlying market is rising. Fundamental, or arbitrage, traders are characterized by heterogeneity, such that there is slow movement between regimes of behavior. In particular, fundamental traders act more quickly in response to small deviations from equilibrium, but are reluctant to act quickly in response to larger mispricings that are exposed to greater noise trader price risk. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:343–368, 2006     

Skewness and index futures return

In this paper, we show that the individual skewness, defined as the average of monthly skewness across firms, performs very well at predicting the return of S&P 500 index futures. This result holds after controlling for the liquidity risk or for the current business cycle conditions. We also find that individual skewness performs very well at predicting index futures returns out-of-sample.     

Price discovery in the hang seng index markets: Index,futures, and the tracker fund

In this paper, price discovery among the Hang Seng Index markets is investigated using the Hasbrouck and Gonzalo and Granger common‐factor models and the multivariate generalized autoregressive conditional heteroskedasticity (M‐GARCH) model. Minute‐by‐minute data from the Hang Seng Index, Hang Seng Index futures, and the tracker fund show that the movements of the three markets are interrelated. The futures markets contain the most information, followed by the spot market. The tracker fund does not contribute to the price discovery process. The three markets exhibit spillover effects, indicating that their second moments are linked, even though the flow of information from the tracker fund to the other markets is minimal. Overall results suggest that the three markets have different degrees of information processing abilities, although they are governed by the same set of macroeconomic fundamentals. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:887–907, 2004     

The effect of the introduction of Cubes on the Nasdaq‐100 index spot‐futures pricing relationship

This paper examines the impact of the introduction of the Nasdaq‐100 Index Tracking Stock (referred to as Cubes) on the pricing relationship between Nasdaq‐100 futures and the underlying index. Observations obtained from tick‐by‐tick Nasdaq‐100 futures transactions and index value data support the hypothesis that the introduction of Cubes in March 1999 has led to improvements in the Nasdaq‐100 index futures pricing efficiency. Both the size and frequency of violations in futures price boundaries appear to be reduced. Furthermore, there appears to be an increase in the speed of the market response to observed violations. These results are attributed to the increased ease in establishing a spot Nasdaq‐100 index position after the introduction of the tracking stock. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 197–218, 2002     

How electronic trading affects bid‐ask spreads and arbitrage efficiency between index futures and options

This paper examines the impact of switching to electronic trading on the relative pricing efficiency of Hang Sang Index futures and options contracts traded on the Hong Kong exchange. The study is motivated by the recent shift in 2000 from the pit to an electronic trading platform. Electronic trading leads to lower bid‐ask spreads and less price clustering than floor trading in both the options and futures markets. Mispricing between futures and options drops significantly after the change. Quicker correction of mispricing indicates a significant improvement in dynamic inter‐market arbitrage efficiency with electronic trading. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:375–398, 2005