Information transmission in informationally linked markets: Evidence from US and Chinese commodity futures markets

This paper investigates information transmission and price discovery in informationally linked markets within the multivariate generalized autoregressive conditional heteroskedasticity and information share frameworks. Based on both synchronous and non-synchronous trading information from Chinese futures/spot markets, the New York Mercantile Exchange (NYMEX), Chicago Board of Trade (CBOT), and CME Globex futures markets for copper and soybeans, we show that there is a bidirectional relationship in terms of price and volatility spillovers between US and Chinese markets, with a stronger effect from US to Chinese markets than the other way around. Additionally, the NYMEX and CBOT play a more important role than the CME Globex in the flow of information from US to Chinese markets. Moreover, we find that Chinese copper market adjusts more quickly than the NYMEX copper market to correct the disparity between both markets. However, the converse is true in the case of soybeans. Finally, our results highlight the remarkable role of Chinese futures markets in the price formation process, though NYMEX and CBOT futures markets are the main driving force in price discovery.     

Analytical pricing of discretely monitored Asian-style options: Theory and application to commodity markets

We compute an analytical expression for the moment generating function of the joint random vector consisting of a spot price and its discretely monitored average for a large class of square-root price dynamics. This result, combined with the Fourier transform pricing method proposed by Carr and Madan [Carr, P., Madan D., 1999. Option valuation using the fast Fourier transform. Journal of Computational Finance 2(4), Summer, 61–73] allows us to derive a closed-form formula for the fair value of discretely monitored Asian-style options. Our analysis encompasses the case of commodity price dynamics displaying mean reversion and jointly fitting a quoted futures curve and the seasonal structure of spot price volatility. Four tests are conducted to assess the relative performance of the pricing procedure stemming from our formulae. Empirical results based on natural gas data from NYMEX and corn data from CBOT show a remarkable improvement over the main alternative techniques developed for pricing Asian-style options within the market standard framework of geometric Brownian motion.     

Transmisión de precios futuros de maíz del Chicago Board of Trade al mercado spot mexicano

In Mexico, the use of currency hedging program from the Agency Services for Marketing and Agricultural Market Development (ASERCA) is an instrument that has been used by producers of corn (mostly white), for the acquisition of derivatives in the Chicago Board of Trade (CBOT), whose underlying is yellow corn quality US#2. In an environment of high volatility in corn prices, CBOT prices should be adjusted with domestic spot prices to encourage Mexican producers to participate in the program, but through an analysis of multivariate stochastic volatility during the period 2007 to 2012, it showed that the market price of corn futures is not closely related to those recorded prices in some country states, so we can infer that the coverage by ASERCA program does not adequately serves the purpose of protecting domestic farmers growing white corn, although their use has increased.     

SLIPPAGE AND THE CHOICE OF MARKET OR LIMIT ORDERS IN FUTURES TRADING

Retail futures traders face uncertainty regarding the price they will obtain when trading. This price "surprise," known as slippage, can be substantial. Using unique data from an introducing brokerage for Chicago Board of Trade (CBOT) wheat, corn, and soybean futures contracts, we quantify time-to-clear and the magnitude of slippage. We then identify factors that affect these trade quality measures. Finally, we analyze individual trader choice between market and limit orders and find that the likelihood of placing limit orders, where regulations protect traders from slippage, is greater when order and market characteristic indicate that adverse slippage is likely.     

全球玉米期货市场关联性、动态预测和定价权研究——基于中日美三国实证分析

利用协整检验、方差分解和脉冲响应分析技术对中国、美国、日本3家期货交易所的玉米期货价格互动关系与动态预测进行研究,结果发现：大连与芝加哥交易所的期货价格之间存在长期均衡关系,总方差中来自于芝加哥、大连和东京交易所分别为39.84%、33.93%和26.23%;芝加哥交易所对于价格波动的冲击效率优于大连和东京交易所,在世界玉米期货市场中,芝加哥交易所的影响力与权威性最强,中国要成为大宗商品的国际定价中心,可以采取投资者结构合理化与多元化等6个相应的对策与战略。     

Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts

In a seminal article, Samuelson (1965) [Samuelson, P. A. (1965), “Proof that properly anticipated prices fluctuate randomly,” Industrial Management Review 6, 41-49.] proposes the maturity effect that the volatility of futures prices should increase as futures contract approaches maturity. This study provides new evidence on the maturity effect by examining a more extensive set of futures contracts than previous studies and analyzing each contract separately. Using 6805 futures contracts drawn from 61 commodities, including some data from non-US markets, we find that the maturity effect is absent in the majority of contracts. In addition, the maturity effect tends to be stronger in agricultural and energy commodities than in financial futures. We also examine the hypothesis in Bessembinder et al. (1996) [Bessembinder, H., J. F. Coughenour, P. J. Seguin, & M. M. Smoller (1996), “Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis,” Journal of Derivatives 4, 45-58.], which states that negative covariance between the spot price and net carry cost causes the maturity effect in futures. Our results provide very weak evidence in favor of this hypothesis.     

Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange

This paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid‐ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.     

Pricing the Chicago Board of Trade T-Bond futures

The aim of this paper is to investigate the pricing of the Chicago Board of Trade (CBOT) Treasury-Bond futures. The difficulty in pricing it arises from its multiple inter-dependent embedded delivery options, which can be exercised at various times and dates during the delivery month. We consider a general Markov diffusion process model for stochastic interest rates and propose a pricing algorithm that can handle all the delivery rules embedded in the CBOT T-Bond futures. Our procedure combines dynamic programming, finite-elements approximation, and fixed-point evaluation. Numerical illustrations are provided under the one-factor Vasicek and Cox–Ingesoll–Ross models, and under the time in-homogeneous Hull–White model.     

Transmission of future prices of corn of the Chicago Board of Trade to the Mexican spot market

In Mexico, the use of the coverage program of the Bureau of Market Services and Agricultural Market Development (ASERCA for its acronym in Spanish) is a tool that has been used by corn producers (mainly for white corn) for the acquisition of derived products in the CBOT (Chicago Board of Trade), the underlying element of which is US#2 grade yellow corn. In a high volatility environment regarding the prices of corn, the prices of CBOT should be adjusted with the spot domestic prices to incentivize Mexican producers to participate in the program. However, through a multivariate stochastic volatility analysis during the period of 2007–2012, it was shown that the future price of corn is not strongly related to the prices registered in some states of the country, therefore, it can be inferred that the coverage through the ASERCA program does not properly comply with its objective of protecting the national farmers that grow white corn, despite the fact that its use has increased.     

News Releases, Market Integration, and Market Leadership

Using intraday data we examine the response of futures on the British Long Gilt (Gilt), the German Government Bond (Bund), the U.S. Treasury Bond (Bond), the Japanese Government Bond (JGB), and the Italian Government Bond (IGB) to the release of U.S. macroeconomic news. Bond, Gilt, and Bund futures respond strongly to the news releases. The response of JGB futures is less pronounced, and IGB futures display weak responses at best. The instruments take time to adjust to news in the announcements. Following the announcements, Bond futures exert a high degree of market leadership. Evidence of increasing market integration is also noted.     

Evaluation of linear asset pricing models by implied portfolio performance

We present a theoretical perspective that motivates the use of the Generalized Least Squares R-Square, prominently advocated by Lewellen et al. [Lewellen, J., Nagel, S., Shanken, J., forthcoming. A skeptical appraisal of asset-pricing tests. Journal of Financial Economics], as an evaluation measure for multivariate linear asset pricing models. Adapting results from Shanken [Shanken, J., 1985. Multivariate tests of the zero-beta CAPM. Journal of Financial Economics 14, 327–348] and Kandel and Stambaugh [Kandel, S., Stambaugh, R.F., 1995. Portfolio inefficiency and the cross-section of expected returns. Journal of Finance 50, 157–184], we provide various interpretations and a graphical account in mean-variance space of this measure, facilitating a better understanding of its properties. We furthermore relate it to another leading evaluation metric, the HJ-distance of Hansen and Jagannathan [Hansen, L.P., Jagannathan, R., 1997. Assessing specification errors in stochastic discount factor models. Journal of Finance 52, 557–590]. Additionally, we present a comparison between these evaluation measures using mean-variance mathematics in risk-return space, and we provide a simple formula for calculating both model evaluation measures that involves only the parameters of the mean-variance asset and factor frontiers.     

Accurate minimum capital risk requirements: A comparison of several approaches

In this paper we estimate, for several investment horizons, minimum capital risk requirements for short and long positions, using the unconditional distribution of three daily indexes futures returns and a set of short and long memory stochastic volatility and GARCH-type models. We consider the possibility that errors follow a t-Student distribution in order to capture the kurtosis of the returns’ series. The results suggest that accurate modelling of extreme observations obtained for long and short trading investment positions is possible with an autoregressive stochastic volatility model. Moreover, modelling futures returns with a long memory stochastic volatility model produces, in general, excessive volatility persistence, and consequently, leads to large minimum capital risk requirement estimates. Finally, the models’ predictive ability is assessed with the help of out-of-sample conditional tests.     

Seasonality and the valuation of commodity options

Price movements in many commodity markets exhibit significant seasonal patterns. However, given an observed futures price, a deterministic seasonal component at the price level is not relevant for the pricing of commodity options. In contrast, this is not true for the seasonal pattern observed in the volatility of the commodity price. Analyzing an extensive sample of soybean, corn, heating oil and natural gas options, we find that seasonality in volatility is an important aspect to consider when valuing these contracts. The inclusion of an appropriate seasonality adjustment significantly reduces pricing errors in these markets and yields more improvement in valuation accuracy than increasing the number of stochastic factors.     

The Samuelson hypothesis in futures markets: An analysis using intraday data

This paper considers the Samuelson hypothesis, which argues that the futures price volatility increases as the futures contract approaches its expiration. Utilizing intraday data from 20 futures markets in six futures exchanges, we find strong support for the Samuelson hypothesis in agricultural futures. However, the Samuelson hypothesis does not hold for other futures contracts. We also provide supporting evidence that the ‘negative covariance’ hypothesis is the key factor for the empirical support of the Samuelson hypothesis. In addition, our findings remain largely unaltered even after we control for seasonality and liquidity effects.     

Pinning in the S&P 500 futures

We show that Standard & Poor's (S&P) 500 futures are pulled toward the at-the-money strike price on days when serial options on the S&P 500 futures expire (pinning) and are pushed away from the cost-of-carry adjusted at-the-money strike price right before the expiration of options on the S&P 500 index (anti-cross-pinning). These effects are driven by the interplay of market makers' rebalancing of delta hedges due to the time decay of those hedges as well as in response to reselling (and early exercise) of in-the-money options by individual investors. The associated shift in notional futures value is at least $115 million per expiration day.     

Valuation of commodity derivatives in a new multi-factor model

This paper extends existing commodity valuation models to allow for stochastic volatility and simultaneous jumps in the spot price and spot volatility. Closed-form valuation formulas for forwards, futures, futures options, geometric Asian options and commodity-linked bonds are obtained using the Heston (1993) and Bakshi and Madan (2000) methodology. Stochastic volatility and jumps do not affect the futures price at a given point in time. However, numerical examples indicate that they play important roles in pricing options on futures. This revised version was published online in June 2006 with corrections to the Cover Date.     

Inflation-indexed swaps and swaptions

This article considers the pricing and hedging of inflation-indexed swaps, and the pricing of inflation-indexed swaptions, and options on inflation-indexed bonds. To price the inflation-indexed swaps, we suggest an extended HJM model. The model allows both the forward rates and the consumer price index to be driven, not only by a standard multidimensional Wiener process but also by a general marked point process. Our model is an extension of the HJM approach proposed by Jarrow and Yildirim [Jarrow, R., Yildirim, Y., 2003. Pricing treasury inflation protected securities and related derivatives using an HJM model. Journal of Financial and Quantitative Analysis 38, 409–430] and later also used by Mercurio [Mercurio, F., 2005. Pricing inflation-indexed derivatives. Quantitative Finance 5 (3), 289–302] to price inflation-indexed swaps. Furthermore we price options on so called TIPS-bonds assuming the model is purely Wiener driven. We then introduce an inflation swap market model to price inflation-indexed swaptions. All prices derived have explicit closed-form solutions. Furthermore, we formally prove the validity of the so called foreign-currency analogy.     

Investors’ preference towards risk: evidence from the Taiwan stock and stock index futures markets

We apply the stochastic dominance (SD) tests proposed by Linton et al. (2005) and Davidson and Duclos (2000) for risk averters and risk seekers to examine investors’ preferences with respect to the Taiwan stock index and its corresponding index futures. We find that there is no first‐order SD relationship between Taiwan spot and futures. However, for second‐ and third‐order SD, we find that spot dominates futures for risk averters whereas futures dominates spot for risk seekers. The implication is that to maximize their expected utilities, risk averters prefer to buy stocks, whereas risk seekers prefer long index futures.     

Are options redundant? Further evidence from currency futures markets

This paper investigates the impact of the introduction of options on the underlying asset's price formation process, using Geweke feedback measures. We derive the feedback measures from the Deutsche Mark, British Pound, Swiss Franc, Japanese Yen and Canadian Dollar futures and spot prices, before and after the introduction of options for these currency futures. While each currency market maintains some distinct characteristics in the post-option period, a common theme is found: after the option introduction, the instantaneous feedback between spot and futures markets improves drastically. The feedback from the spot to the futures market tends to decrease and remains small. The feedback from the futures market to the spot market tends to decrease as well. These results confirm the dominance of options markets, probably due to their smaller transaction costs. When made available, options assume a leading role for information transmission in currency markets.     

News announcements and price discovery in foreign exchange spot and futures markets

This paper studies competition in price discovery between spot and futures rates for the EUR–USD and JPY–USD markets around scheduled macroeconomic announcements. Using both the information shares approach and the common factor component weight approach for futures prices from the Chicago Mercantile Exchange (CME), as well as deal prices from spot trading on the Electronic Broking Services (EBS), we gauge how foreign exchange spot and futures markets respond to news surprises. The results show that the spot rates provide more price discovery than do the CME futures rates overall; however, the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases.