Regulatory reform and market efficiency: The case of Indian agricultural commodity futures markets

We present the results of two efficiency measures that include intraday return predictability measure based on order imbalance and measures of several variance ratio tests on intraday subsamples of nine major Indian agricultural commodity futures (castor seed, cotton oil cake, rape mustard seed, soybean, refined soya oil, crude palm oil, jeera, chana, and turmeric) quoted in the National Commodity and Derivatives Exchange (NCDEX). We perform the efficiency measures on five subsamples with holding periods of 5, 10, 15, 30, and 60 min over two sample periods following the announcement of the merger between the Forward Market Commission (FMC) and Securities Exchange Board of India (SEBI). We compare results of tests of weak-form market efficiency of futures markets between two periods (pre-merger period and post-merger period). Our results confirm that Indian agricultural commodity futures markets continue to remain inefficient in the short-term during both pre-merger and post-merger periods. Based on these findings, it is likely that profitable trading strategies in the short intraday intervals will be available for traders and market participants during post-merger period. Thus, regulators must focus more on policy initiative so as to enhance market quality in order to address such inefficiencies in Indian commodity futures markets.     

The Effects of Unanticipated Macroeconomic News on Debt Markets

We examine the effects of unanticipated macroeconomic news on two interest rate futures using intraday data. The surprises are identified on the basis of their potential effects on debt markets (positive or negative) and by their size (large, medium, or small). The results show distinct ex‐post return patterns associated with different categories of news surprises. For example, large surprises have the strongest immediate effects whereas negative surprises have the longest persisting effects. Tests that examine the separate effects of each announcement suggest that debt responses vary with the size and potential effect of the news surprise in each announcement.     

Russia–Ukraine crisis: The effects on the European stock market

We examine the effect of the Russia–Ukraine crisis on the European stock markets. Because of increased political uncertainty, geographic proximity and the ramifications of the fresh sanctions imposed on Russia, the European stock markets tended to react negatively to this crisis. We find that on 21 February 2022, when Russia recognized two Ukrainian states as autonomous regions, European stocks incurred a significant negative abnormal return. Moreover, the negative stock price reactions continued in the post-event period. The magnitude of the stock price reactions to this crisis exhibits considerable variation across industries, countries and size of the company.     

Higher-order moment risk connectedness and optimal investment strategies between international oil and commodity futures markets: Insights from the COVID-19 pandemic and Russia-Ukraine conflict

This paper investigates the higher-order moment risk connectedness between West Texas Intermediate (WTI) oil futures, Brent oil futures, Chinese oil futures and commodity futures (agricultural, industrial metals, and precious metals) before and during the COVID-19 pandemic and following the outbreak of the Russia-Ukraine conflict, by combining ex-post moment measures and the novel time-varying parameter (TVP)-vector auto-regression (VAR)-based connectedness approach. Further, this paper depicts the dynamic overall and pairwise correlations between oil and commodity futures and constructs the hedging and optimal-weighted portfolio strategies using the DCC-GARCH t-Copula model. This paper also constructs the multivariate oil-commodity portfolio based on the newly proposed minimum connectedness portfolio approach and takes into account the higher-order moment risk connectedness. The empirical results demonstrate that the dynamic linkages between international oil and commodity futures are positive, time-varying, and have been greatly intensified by the outbreak of the 2018 China-US trade war, the 2020 COVID-19 pandemic, and the 2022 Russia-Ukraine conflict. The risk connectedness results are moment-dependent. The averaged total skewness and kurtosis spillovers are lower than the return and volatility connectedness. Brent (WTI) oil is the largest net transmitter of the return and volatility (skewness and kurtosis) risk spillovers. The dynamic total, net, and net-pairwise spillovers are all time-varying and highly reactive to major crises, especially the COVID-19 pandemic and the Russia-Ukraine conflict. Furthermore, the optimal-weighted portfolio shows a higher risk reduction than the hedging strategy. Finally, the minimum skewness connectedness portfolio shows relatively higher hedging effectiveness, while the minimum kurtosis connectedness portfolio offers the highest cumulative returns.     

Commodity market financialization,herding and signals: An asymmetric GARCH R-vine copula approach

Institutional investors have significantly increased their exposure to commodity futures after 2004 in the process of commodity market financialization, raising questions about the risk-sharing and price-discovery functions of the market. We identify some symptoms of financialization through examining S&P500, JPM bond index, and 18 S&P GSCI excess return indices, employing ARMA-GARCH R-vine copula approach that can flexibly model high-dimensional multivariate asymmetric tail dependence. We discover three trends: an increased resemblance between the news impact curve of stocks and those of commodities; an increased bi-variate stock-commodity tail dependence; and an increased multivariate tail-dependence across all commodities. We also explore the market structural change underlying these symptoms using an augmented news impact curve. We suggest and provide evidence that herding, in addiction to leverage effect, explains the observed symptoms. The findings have profound implications for commercial hedgers and financial traders, and for regulators who are concerned about the functionalities of commodity futures market.     

How Markets Process Information: News Releases and Volatility

We examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets. We find these announcements are responsible for most of the observed time-of-day and day-of-the-week volatility patterns in these markets. While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours. Nonetheless, these subsequent price adjustments are basically independent of the first minute's return. We identify those announcements with the greatest impact on these markets.     

The reaction of asset prices to macroeconomic announcements in new EU markets: Evidence from intraday data

We estimate the impact of macroeconomic news on composite stock returns in three emerging European Union financial markets (the Budapest BUX, Prague PX-50, and Warsaw WIG-20), using intraday data and macroeconomic announcements. Our contribution is twofold. We employ a larger set of macroeconomic data releases than used in previous studies and also use intraday data, an excess impact approach, and foreign news to provide more reliable inferences. Composite stock returns are computed based on 5-min intervals (ticks) and macroeconomic news are measured based on the deviations of the actual announcement values from their expectations. Overall, we find that all three new EU stock markets are subject to significant spillovers directly via the composite index returns from the EU, the U.S. and neighboring markets; Budapest exhibits the strongest spillover effect, followed by Warsaw and Prague. The Czech and Hungarian markets are also subject to spillovers indirectly through the transmission of macroeconomic news. The impact of EU-wide announcements is evidenced more in the case of Hungary, while the Czech market is more impacted by U.S. news. The Polish market is marginally affected by EU news. In addition, after decomposing pooled announcements, we show that the impact of multiple announcements is stronger than that of single news. Our results suggest that the impact of foreign macroeconomic announcements goes beyond the impact of the foreign stock markets on Central and Eastern European indices. We also discuss the implications of the findings for financial stability in the three emerging European markets.     

A continuous time equilibrium model of forward prices and futures prices in a multigood economy

This paper is a theoretical investigation of equilibrium forward and futures prices. We construct a rational expectations model in continuous time of a multigood, identical consumer economy with constant stochastic returns to scale production. Using this model we find three main results. First, we find formulas for equilibrium forward, futures, discount bond, commodity bond and commodity option prices. Second, we show that a futures price is actually a forward price for the delivery of a random number of units of a good; the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract. Third, we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices; these conditions reflect the usefulness of forward and futures contracts as consumption hedges.     

European Union Enlargement Announcement and Corporate Valuations

This study explores the effects of the European Union accession announcement on the valuations of companies in the prospective member states. I examine firm level data from ten countries which joined the EU in May 2004. My analysis reveals that the announcement of these countries’ future EU membership in November 2001 significantly increased the Tobin’s Q ratios of their publicly traded firms several years before formal membership was granted. This increase in firm value can likely be attributed to a reduced cost of capital and/or an expected increase in growth opportunities and cash flows, resulting from the announcement of their countries’ inclusion in the EU.     

Aggregate Market Reaction to Earnings Announcements

This analysis identifies a distinct immediate announcement period negative relation between earnings announcement surprises and aggregate market returns. Such a relation implies that market participants use earnings information in forming expectations about expected aggregate discount rates and, specifically, that good earnings news is associated with a positive shock to required returns. Consistent with this interpretation we find that Treasury bond rates and implied future inflation expectations respond directly to earnings news. We also find some evidence that the negative relation between earnings news and market return persists beyond the immediate announcement period, suggesting that market participants do not immediately fully impound these future market return implications of aggregate earnings news.     

Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

We show that the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests that this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases preannouncement, and subsequently reverses, confounding short‐window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms' earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm‐level, industry‐level, and macroeconomic information events.     

Scenarios on European energy security: Outcomes of natural gas strategy in 2020

This paper adopts a futuristic methodology and analyzes the role of natural gas in European energy security in order to transform economic and policy uncertainties into meaningful scenarios. It implements “trend analysis” to forecast the volume of gas needed until 2020 by elaborating the estimates of the EU Commission and “scenario building” to come up with alternative futures forging different regional implications. The economic analysis stems from four scenarios as introduced by the EU Commission: (1) baseline scenario with average oil price of 61$/bbl; (2) baseline scenario with average oil price of 100$/bbl; (3) New Energy Policy scenario with average oil price of 61$/bbl; (4) New Energy Policy scenario with average oil price of 100$/bbl. The policy analysis is derived from the options, restraints, priorities and strategies of the concerned actors which include the EU Commission, selected EU members, suppliers and transit countries. The analysis on actors results in four policy scenarios: (1) Russia first; (2) Russia everywhere; (3) security first; (4) each for itself. The matrix, which excludes the possibility of unprecedented developments such as a drastic increase in European shale gas production or continuing global recession, clusters 16 contingencies. The paper, within this context, gives an idea on how alternative policy options of European energy security may lead to different futures based on oil prices, environmental commitments and strategic initiatives of the concerned actors.     

Stock salience and the asymmetric market effect of consumer sentiment news

We document asymmetric announcement effects of consumer sentiment news on United States stock and stock futures markets. While a negative market effect occurs upon the release of bad sentiment news, there is no market reaction for the counterpart good news. This supports the “negativity effect” hypothesis. Notably, this effect seems most likely to occur in salient stocks, which is consistent with the availability heuristic.     

Modeling CO2 emission allowance prices and derivatives: Evidence from the European trading scheme

This paper studies the three main markets for emission allowances within the European Union Emissions Trading Scheme (EU ETS): Powernext, Nord Pool and European Climate Exchange (ECX). The analysis suggests that the prohibition of banking of emission allowances between distinct phases of the EU ETS has significant implications in terms of futures pricing. Motivated by these findings, we develop an empirically and theoretically valid framework for the pricing and hedging of intra-phase and inter-phase futures and options on futures, respectively.     

Too Good to be True? An Analysis of the Options Market's Reactions to Earnings Releases

Using option implied risk neutral return distributions before and after earnings announcements, we study the option market's reaction to extreme events over earnings announcements. While earnings announcements generally reduce short‐term uncertainty about the stock price, very good news does not reduce uncertainty and slightly bad news actually increases uncertainty. We also find that left tail probabilities decrease over earnings releases while right tail probabilities increase. We interpret these findings as evidence of maintained investor expectations that very good news is generally not released during earnings announcements, combined with skepticism in the form of lingering uncertainty at the release of such very good news.     

Commodity tax straddles and the valuation of domestic futures exchanges: An analysis of the 1981 Economic Recovery Tax Act

The Economic Recovery Tax Act (ERTA) of 1981 substantially altered the taxation of commodity tax straddles. Prior to 1981, commodity tax straddles were actively promoted and used to defer income, to convert ordinary income into capital gains, or to convert short-term into long-term capital gains. ERTA imposed a mark-tomarket rule of account settlement for the taxation of futures transactions. This study examines the impact of ERTA on the futures industry by utilizing futures exchange seat prices for all domestic futures exchanges. Futures exchange seats represent specialized capital assets whose value reflects the discounted present value of expected future economic rents derived from trading activity. The results indicate that ERTA produced a large decrease in the market valuation of futures exchange capital which was not recaptured in the ten months following the announcement.The financial support of the Columbia Futures Center was essential to the research reported here. The authors thank two anonymous reviewers for helpful suggestions, and Matthew Deno, Darrell Petter, and Shan Guo for valuable research assistance.     

Reprint of: Stock salience and the asymmetric market effect of consumer sentiment news

We document asymmetric announcement effects of consumer sentiment news on United States stock and stock futures markets. While a negative market effect occurs upon the release of bad sentiment news, there is no market reaction for the counterpart good news. This supports the “negativity effect” hypothesis. Notably, this effect seems most likely to occur in salient stocks, which is consistent with the availability heuristic.     

Industry versus ecology: environment in the new Europe

This paper examines the role of the environment in Central and Eastern European states by pursuing the incompatibility between the economic development needed to maintain the democratic institutions already in place, and the crisis levels of environmental degradation in so many areas of Eastern and Central Europe. It is believed that costs of reversing environmental damages in these areas, and the implementation of sustainable development policies and technologies, are so great that the Eastern European states will be unable to meet them, which may lead to a further decline in the environmental quality in both CEE and the EU. This ability to impact the EU's environment could be the major factor in a decision by the EU to implement environmental taxes against these states. As a result, the possibility is raised that Russia may provide an alternative to the EU in the formation of a economically based bloc, with implications for trade, environment and security issues.     

Earnings Announcement Lags and Market Responses—Does the Tone of the News and the Market Sentiment Matter?

We investigate earnings announcement lags (period from the end of the reporting period until the announcement date) for the good and the bad quarterly earnings news across different market sentiment periods as well as market reactions thereto. Companies listed on Baltic stock exchanges exhibit clear signs of strategic timing of earnings announcements. Earnings announcement lags for the bad news tend to be longer than those for the good news. This difference is more pronounced during low market sentiment periods. If the release of the bad news is postponed, abnormal return responses remain lower, as expected.     

Macroeconomic impacts on commodity prices: China vs. the United States

This study compares the macroeconomic impacts of China and the United States on international commodity markets using a factor-augmented vector auto-regression (FAVAR) model with latent factors extracted from a rich data set that includes various macroeconomic and financial indicators at monthly frequency. The main results suggest that whether or not the Chinese demand cause commodity prices to soar depends. Macroeconomic factors of China do have significant impact on commodity markets, but the impacts of the United States outperform those of China in terms of the size of coefficients and their level of significance, as well as the direction and magnitude of directional return spillovers. Moreover, the effects of these factors on individual commodity futures are not a universal phenomenon. Therefore, there is no systematic evidence of a relationship between strong growth in the emerging economy and the boom in commodity futures prices, either statistically or economically.