INDEX FUTURES OPTIONS IN AUSTRALIA -AN EMPIRICAL FOCUS ON VOLATILITY

The futures option contract on the Australian All Ordinaries Share Price Index is a relatively new hybrid security that ought to enhance the richness and potential efficiency of security markets. This paper considers the problems of valuing it using the theoretical price of a futures-style option. It was found that there was little consistency between theoretical prices using a number of historical estimates and observed market prices, either intertemporally or between in-the-money or out-of-the-money calls. Further, implied volatility was found to be a decaying function of time and, except at times of instability, did not predict the ex ante futures volatility as well as historic volatility.     

THE PRICING OF FUTURES CONTRACTS AND THE ARBITRAGE PRICING THEORY

When interest rates are stochastic, the cash flows of futures and forward contracts differ because of the marking-to-market requirement of futures contracts. The price effect of this difference is examined here by applying the risk and return model of the arbitrage pricing theory. The resulting futures pricing equation is preference free, and is obtainable using other no-arbitrage approaches. The pricing equation suggests that the price difference is due to the covariance of spot asset returns and interest rates. An empirical study is conducted on the Major Market Index futures from October 1, 1984 to September 27, 1985. Results indicate that the covariance, extracted by the Kalman filter according to the pricing equation, is significant in the pricing of futures contracts.     

THE EFFECTS OF THE ANNOUNCEMENTS OF DIVIDEND INCREASES ON STOCK RETURN VOLATILITY: THE EVIDENCE FROM THE OPTIONS MARKET

This paper examines the impact of the announcements of dividend increases on the volatility of underlying stock returns implied by option prices, and analyses whether the impact is related to the label associated with the dividend increase. The results suggest that the announcements of labelled dividend increases are accompanied by a decrease in implied volatility, while the announcements of unlabelled increases in dividends are associated with no change in implied volatility. These results are consistent with the hypothesis that signal implicit in the announcements of dividend increases provides noisy information about the firm's volatility.     

THE OVERNIGHT AND DAILY TRANSMISSION OF STOCK INDEX FUTURES PRICES BETWEEN MAJOR INTERNATIONAL MARKETS

Stock index futures prices for the world's major equity markets, Japan, the UK and the US, are used to examine the interaction of international equity markets. By using stock index futures prices, we avoid the nonsynchronous data problem inherent with opening and closing market averages. We find that the US is the dominant world market; overnight returns in Japan and the UK are greatly influenced by the US daily returns. In contrast, the Japanese market has no impact on the overnight or daily returns in the UK, while the UK daily performance has a small influence on Japanese overnight returns. Slight evidence of over-reaction at the opening of Japanese futures exists as the daily Nikkei returns are negatively related to the US returns.     

ON THE RATIONALITY OF COMMON STOCK RETURN VOLATILITY

This paper derives the relationship between the population unconditional variance of common stock returns and the variance of expected returns conditional on a well-specified information set. As a consequence, a lower bound is obtained for the variance of common stock returns. The sample counterpart of this bound is then empirically tested against the sample variance of returns. The paper's main conclusion can be stated as follows: the observed volatility of real (inflation-adjusted) common stock returns is not “irrationally” large. The paper admits of this conclusion because the point estimate of the lower-bound variance derived in this model is actually larger than the point estimate of common stock return volatility. However, since these point estimates are found to have a statistically insignificant difference, equality of the two variances cannot be ruled out. Hence, “rationality” of common stock returns—as implied by a utility-based valuation conditional on a specified information set—cannot be rejected.     

TIME‐VARYING VOLATILITY IN CANADIAN AND U.S. STOCK INDEX AND INDEX FUTURES MARKETS: A MULTIVARIATE ANALYSIS

We use a multivariate generalized autoregressive heteroskedasticity model (M‐GARCH) to examine three stock indexes and their associated futures prices: the New York Stock Exchange Composite, S&P 500, and Toronto 35. The North American context is significant because markets in Canada and the United States share similar structures and regulatory environments. Our model allows examination of dependence in volatility as it captures time variation in volatility and cross‐market influences. Estimated time variation in volatility is significant, and the volatilities are highly positively correlated. Yet, we find that the correlation in North American index and futures markets has declined over time.     

PRICING CURRENCY FUTURES OPTIONS WITH LOGNORMALLY DISTRIBUTED JUMPS

We find that a mixed diffusion-jump process fits most daily currency futures price series better than a mixture of normal densities and, especially, an asymmetric stable Paretian model. We also find that Merton's (1976) mixed diffusion-jump option pricing model outperforms Black's (1 976) model for valuing currency futures options. Our results suggest that researchers should begin to consider the possibility of jump processes as time-independent models of other futures price series.     

TAX-TIMING OPTIONS AND THE PRICING OF GOVERNMENT BONDS

Internal Revenue Code provisions affect trading strategies for long-term, fixed-payment securities when investment income is subject to taxation and can create tax-timing options of varying nontrivial values for specific bonds at specific times. In this paper, an estimate of the tax bracket of the marginal investor is used to measure the relative impact of changing tax-timing option values on government bond prices. Results support the argument that tax-timing options help to explain an apparent discrepancy between theoretical arguments regarding the tax bracket of the marginal investor and observed market relationships.