An analysis of illiquidity in commodity markets

We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.     

Price impact asymmetry of futures trades: Trade direction and trade size

By analyzing the high-quality intraday transaction dataset of KOSPI200 index futures contracts, one of the most actively traded index futures products in the world, this study examines price impact asymmetry between buyer- and seller-initiated trades and the difference in information content across the size of trades. To measure the permanent price impact incurred by each futures trade, which can be translated into the quality of information content of each trade, we use a modified version of the MRR model (Madhavan et al., 1997), which is appropriate for gauging the price impact and information content as well as analyzing the intraday price discovery issues that arise in purely order-driven markets.Consistent with the empirical results of previous studies on market microstructure issues in Korea's index derivatives market (i.e., KOSPI200 index futures and options market), we find that large trades generally incur greater permanent price impacts than small trades. This indicates that large trades generally have greater information content than the smaller ones. However, in contrast to the majority of empirical studies in this area, which have reported that buy trades are more informative than sell trades in global financial markets, we find that the permanent price impact of seller-initiated trades is clearly and substantially larger than that of buyer-initiated trades in the KOSPI200 futures market. This indicates that sell trades are more informed than buy trades in the index futures market, where informed investors can freely submit sell orders without any restrictions. The greater information content of sell trades is also apparent when trades are classified by their size. These results are quite remarkable considering that the sample period of this study (2003–2006) corresponds to a recovery period, during which the underlying stock index price and the futures price continued to increase.     

Can market frictions really explain the price impact asymmetry of block trades? Evidence from the Saudi Stock Market

We empirically examine the price impact of block trades, in the Saudi Stock Market over the time period of 2005–2008. Using a unique dataset of intraday data consisting of 2.3 million block buys and 1.9 million block sales, we find an asymmetry in the price impact of block purchases and sales. The asymmetry persists even when we account for the bid–ask bias in block trades, which is contrary to the previous literature. Overall, our findings suggest that in an emerging market where institutional trading is relatively scarce, market microstructure cannot explain the asymmetry in the price impact of large trades.     

Informed trade in spot foreign exchange markets: an empirical investigation

This paper presents new evidence on information asymmetries in inter-dealer FX markets. We employ a new USD/DEM data set covering the activities of multiple dealers over one trading week. We utilise and extend the VAR structure introduced in Hasbrouck [J. Finance 46(1) (1991) 179] to quantify the permanent effects of trades on quotes and show that asymmetric information accounts for around 60% of average bid-ask spreads. Further, 40% of all permanent price variation is shown to be due to transaction-related information. Finally, we uncover strong time-of-day effects in the information carried by trades that are related to the supply of liquidity to D2000-2; at times when liquidity supply is high, individual trades have small permanent effects on quotes but the proportion of permanent quote variation explained by overall trading activity is relatively high. In periods of low liquidity supply the converse is true—individual trades have large permanent price effects but aggregate trading activity contributes little to permanent quote evolution.     

Speculation and hedging in the currency futures markets: Are they informative to the spot exchange rates

This study presents an empirical analysis investigating the relationship between the futures trading activities of speculators and hedgers and the potential movements of major spot exchange rates. A set of trader position measures are employed as regression predictors, including the level and change of net positions, an investor sentiment index, extremely bullish/bearish sentiments, and the peak/trough indicators. We find that the peaks and troughs of net positions are generally useful predictors to the evolution of spot exchange rates, but other trader position measures are less correlated with future market movements. In addition, speculative position measures usually forecast price‐continuations in spot rates while hedging position measures forecast price‐reversals in these markets. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

Hedging performance analysis of energy markets: Evidence from copula quantile regression

This study investigates hedging performance with respect to different market structures for energy-related commodities, including West Texas Intermediate crude oil, Brent crude oil, Chinese crude oil, and Heating oil. Copula quantile regression functions and the generalized autoregressive conditionally heteroscedasticity model are combined to analyze the nonlinear impact of dependence and the heterogeneous impact of market structure changes on hedging performance. Results show that hedging performance presents nonlinearity and market structure changes have surprisingly strong heterogeneous effects on the quantile hedge ratio, where bearish and bullish have lower hedge ratios than normal markets, which is captured better by Clayton copula quantile regression. Additionally, the trend of hedging effectiveness over different market structures also shows an inverted U shape. After changing data frequency or the types of futures contracts, the conclusions remain the same. Our empirical findings imply that hedgers are supposed to adjust the hedging number of futures according to market structure changes to hedge price risk effectively.     

The price impact of futures trades and their intraday seasonality

This study examines the price impact of futures trades and their intraday seasonality by analyzing the continuous trading session dataset of KOSPI 200 futures, including the opening and closing periods. For this purpose, the study analyzes the futures dataset that contains information on transaction times, trade directions, order sizes, and the types of investors initiating the transactions. The results suggest several novel findings. First, a substantial portion of the price impact of futures trades is persistent, indicating the presence of informed trading in the futures market. Second, informed trading is concentrated in the opening period and liquidity trading is concentrated in the closing period of the continuous trading session. Third, small trades usually have a greater price impact than large ones, supporting the existence of stealth trading by futures traders. Fourth, trades by institutional investors have a greater price impact than those by individuals, suggesting that institutional investors are better informed and/or more sophisticated than individual investors in the futures market.     

Price Discovery and Trading after Hours: New Evidence from the World’s Largest Carbon Exchange

We investigate the impact of after-hours trading on magnitude and timing of price discovery over the close-to-close period on the world’s largest carbon trading platform, the European Climate Exchange (ECX). Low-volume trading in carbon financial instruments can lead to relatively high levels of price discovery, but the generated pricing has low efficiency levels. This is associated with high levels of informed trades and low levels of liquidity trades. Our results show higher trading volume per minute and greater price efficiency for after hours when compared with regular trading hours. As a result of a higher proportion of informed trades, adverse selection costs for trades after hours are significantly larger than those for trades during the regular trading day.     

我国股市非对称反应影响因素的实证分析

本文运用T-Garch-M模型对我国股票市场的特征风格指数和不同样本期的综合指数进行了实证分析,结果表明,市道(牛市或熊市)、市盈率高低、盈利状况(绩优或绩差)、股价高低和股票风格特征(价值股或成长股)等因素对我国股票市场信息非对称反应有显著影响,股票规模大小(盘子大小和市值大小)对非对称性反应的影响不显著。     

Stock liquidity and ownership structure during and after the 2008 Global Financial Crisis: Empirical evidence from an emerging market

This paper examines the impact of ownership structure, whether state owned, foreign owned or institutionally owned, on Vietnamese stock market liquidity in different market conditions. We find that state ownership is associated with lower liquidity after the 2008 financial crisis. Institutional ownership shows a weak influence on liquidity in the post-crisis period. During the financial crisis, however, liquidity declines could not be attributed to ownership structure. Our results imply that foreign investors have not yet played a significant role in driving stock market liquidity in Vietnam, which is counter to findings in the existing literature concerning liquidity in more developed markets. Our results are consistent across conventional liquidity measures and a composite liquidity measure.     

Does International Order Flow Contribute to Price Discovery in Futures Markets?

This study examines whether order flow originating from overseas contributes to price discovery in domestic futures markets. This issue is examined using a unique dataset for stock index futures traded on the Australian Securities Exchange that identifies the geographic location of computer servers on which orders are placed. We find that (i) transactions originating from overseas servers have a significant impact on the price volatility of stock index futures; (ii) trades initiated from international servers also have a permanent impact on price; and (iii) price movements caused by trades initiated from overseas servers lead those on domestic servers and make a greater contribution to price discovery. Our results confirm that international order flow is important in the price discovery process in domestic markets.     

Transactions in futures markets: Informed or uninformed?

Using a proprietary data set from the Sydney Futures Exchange, this study reconciles an inconsistency in futures microstructure literature. One strand of the literature documents that single trades in futures markets contain information, whereas another strand finds that trade packages in futures markets do not contain information. This study controls for methodological and sample differences in examining the price impact of individual trades and trade packages. We find little evidence that transactions in futures markets contain information. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1159–1174, 2007     

Naming Products in China: Local or Foreign Branding

ABSTRACT

This study examines the effect of program trades on the price changes in the Korean stock index futures and spot markets employing intraday return and trading data. Program trades in the Korean stock market create an instant imbalance in market liquidity. However, their impact is very short-lived and limited in an economic sense. Moreover, there is little tendency for market returns to over-react to program trades. An increase in program trades results in higher spot market volatility but does not cause monotonically increasing futures market volatility. Overall, program trades do not destabilize the stock market in Korea despite some positive association between program trades and volatility.     

高波动股市下的条件相关与风险分散效果

在一般化误差分配假设下,利用风险值估计的方法分别求出台湾地区股票市场牛市与熊市的条件相关系数,以检验风险分散的效益。实证研究发现:在高波动期间,股市类股指数的条件相关性及非系统风险皆显著小于平常时期,显示股市的联动性及非系统风险在高波动期间会较低,此与过去文献的发现相反。然而,不论在高波动期间还是在平常期间,股市的联动性都偏高,投资者或基金经理人应该尽可能运用国际多角化的投资,以提高风险分散的效益。     

A realistic model of market liquidity and depth

A model that realistically defines market liquidity and depth is introduced. Liquidity is the expected rate of order execution in shares per minute. Depth is the average density of the limit order book in shares per dollar. Illiquid markets tend to exhibit longer execution delays and indirectly higher risk related to price impact. Markets with low depth are characterized by high price sensitivity and larger risks. Deviations from fundamental value exist because arbitraging them away carries liquidity cost, entails impact risk, and generates negatively skewed profits. Premia include liquidity and transparency components. In order to avoid excessive frontrunning and liquidity withholding around their block trade, traders break their block orders into smaller orders. In anonymous markets, the trader discriminates against early liquidity providers, and is only compensated for liquidity. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:443–464, 2005     

Risk management with options and futures under liquidity risk

Futures hedging creates liquidity risk through marking to market. Liquidity risk matters if interim losses on a futures position have to be financed at a markup over the risk‐free rate. This study analyzes the optimal risk management and production decisions of a firm facing joint price and liquidity risk. It provides a rationale for the use of options on futures in imperfect capital markets. If liquidity risk materializes, the firm sells options on futures in order to partly cover this liquidity need. It is shown that liquidity risk reduces the optimal hedge ratio and that options are not normally used before a liquidity need actually arises. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:297–318, 2009     

Commodity Price,Carry Trade,and the Volatility and Liquidity of Asian Currencies

This study examines how the volatility and liquidity of 10 Asian exchange rates against the US dollar change with volatilities in commodity price and carry trade over the period of January 2000 to June 2010. We find that uncertainties in commodity markets and carry trades are significantly correlated with the volatilities and the bid‐ask spreads of most Asian currencies. The correlation with carry trade is generally stronger and has been rising over the sample period. While high volatilities in carry trade are associated with high volatilities in many Asian currencies, high volatilities in commodity price do not coincide with excessive volatilities in Asian currencies. This suggests that investors and policymakers should be more concerned with the volatility in carry trade.     

Global excess liquidity and asset prices in emerging countries: A PVAR approach

The overly accommodating monetary policy is often accused of creating surplus liquidity and bubbles on the asset markets. In particular, it could have contributed to strong capital inflows in emerging countries, which may have had a significant impact on financial stability in these countries, affecting domestic financing conditions and creating a risk of upward pressures on asset prices. We focus in this paper on the impact of global excess liquidity on goods and asset prices for a set of emerging market countries by estimating a panel VAR model. We define first global liquidity and highlight situations of excess liquidity. We then find that excess liquidity at global level has spillover effects on output and price levels in emerging countries. The impact on real estate, commodity and share prices in emerging countries is less clear.     

Spillovers and connectedness among BRICS stock markets,cryptocurrencies, and uncertainty: Evidence from the quantile vector autoregression network

In this study we advance the understanding of the spillovers and connectedness network among conventional and Islamic BRICS stock markets, cryptos (Bitcoin, Ethereum, Litecoin) and various global uncertainties, using a quantile vector autoregression method and daily data covering the period October 8, 2016, to May 28, 2021. Further, the study uses a network and sensitivity analyses to assess the nexus, examines risk causes, and the transfer paths in these markets under bearish, normal, and bullish markets. The evidence offers major findings. First, the overall static and dynamic connectedness is very high and more intense at extreme events. Second, the network connectedness structure shows that the markets have played both roles: net transmitters and receivers of shocks under several market states. Finally, the sensitivity to quantiles analysis shows switching behavior of net transfer spillovers over the quantiles. This could be beneficial to investors aiming at optimizing hedging strategies. Policymakers should consider carefully the overall network connectedness in the market system and formulate appropriate policies to conceive stock market price sensitivity.     

The determinants of price discovery on bitcoin markets

This paper investigates whether market quality, uncertainty, investor sentiment and attention, and macroeconomic news affect bitcoin price discovery in spot and futures markets. Over the period December 2017–March 2019, we find significant time variation in the contribution to price discovery of the two markets. Increases in price discovery are mainly driven by relative trading costs and volume, and uncertainty to a lesser extent. Additionally, medium-sized trades contain most information in terms of price discovery. Finally, higher news-based bitcoin sentiment increases the informational role of the futures market, while attention and macroeconomic news have no impact on price discovery.