Market volatility and the demand for hedging in stock index futures

This study examines the relation between stock market volatility and the demand for hedging in S&P 500 stock index futures contracts. Open interest is used as a proxy for hedging demand. The analysis employs unique data that identify separately the open interest of large hedgers, large speculators, and smaller traders. Volatility estimates are decomposed into expected and unexpected components, to assess whether traders’ reactions to volatility depend upon its predictability. Results indicate that daily open interest for hedgers increases when unexpected volatility increases. Increases in unexpected volatility may cause hedgers to raise their estimates of future expected volatility, and hence increase their demand for hedging. Open interest of speculators is not related to expected volatility, and is only weakly related to unexpected volatility. The increase in the participation of hedgers in periods of higher volatility is significantly larger than the increase in the participation of speculators. The results suggest that increases in stock market volatility increase the demand for hedging. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20: 105–125, 2000     

The effect of net positions by type of trader on volatility in foreign currency futures markets

We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co‐vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:427–450, 2002     

Volatility and trading demands in stock index futures

In this study we examine how volatility and the futures risk premium affect trading demands for hedging and speculation in the S&P 500 Stock Index futures contracts. To ascertain if different volatility measures matter in affecting the result, we employ three volatility estimates. Our empirical results show a positive relation between volatility and open interest for both hedgers and speculators, suggesting that an increase in volatility motivates both hedgers and speculators to engage in more trading in futures markets. However, the influence of volatility on futures trading, especially for hedging, is statistically significant only when spot volatility is used. We also find that the demand to trade by speculators is more sensitive to changes in the futures risk premium than is the demand to trade by hedgers. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:399–414, 2003     

Causality in futures markets

This study tests causal hypotheses emanating from theories of futures markets by utilizing methods appropriate for disproving causal relationships with observational data. The hedging pressure theory of futures markets risk premiums, the generalized version of the normal backwardation theory of Keynes, is rejected. Theories predicting that the activity levels of speculators or uninformed traders affect levels of price volatility, either positively or negatively, are also rejected. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:1039–1057, 2006     

Are speculators informed?

The positions of hedgers and speculators are correlated with returns in a number of futures markets, but there is much debate as to the interpretation of such a relationship—whether it reflects private information, liquidity, or trend‐chasing behavior. This paper studies the relationship between positioning of hedgers and speculators and returns in equity futures markets. I propose a novel test of the private information hypothesis: analyzing the effect of public announcements about futures positions on prices, using high‐frequency data in short windows around the announcements. I find that the revelation of speculators' positions is informative to investors more broadly, supporting the private information view. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

Long‐term information,short‐lived securities

The authors explore strategic trade in short‐lived securities by agents who have private information that is potentially long‐term, but do not know how long their information will remain private. Trading short‐lived securities is profitable only if enough of the private information becomes public prior to contract expiration; otherwise the security will worthlessly expire. How this results in trading behavior fundamentally different from that observed in standard models of informed trading in equity is highlighted. Specifically, it is shown that informed speculators are more reluctant to trade shorter‐term securities too far in advance of when their information will necessarily be made public, and that existing positions in a shorter‐term security make future purchases more attractive. Because informed speculators prefer longer‐term securities, this can make trading shorter‐term contracts more attractive for liquidity traders. The conditions are characterized under which liquidity traders choose to incur extra costs to roll over short‐term positions rather than trade in distant contracts, providing an explanation for why most longer‐term derivative security markets have little liquidity and large bid‐ask spreads. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:465–502, 2006     

Do small traders contribute to price discovery? Evidence from the Hong Kong Hang Seng Index markets

Using one‐contract‐size trades in the Mini Hang Seng Index futures to proxy the activities of small traders, this study empirically investigates the information contribution of small futures traders to price discovery on the Hang Seng Index (HSI) markets. Estimated with the models of Gonzalo, J., and Granger, C. W. J. ( 1995 ) and Hasbrouck, J. ( 1995 ), the results show that small traders contribute about 16.8% to price discovery, a disproportionately high share considering their relatively low trading volume. The results also indicate that the Hang Seng Index futures (HSIF) market still has the largest information share (about 71.0%), whereas the HSI spot market has a 12.2% share. Our results suggest that small traders are not uninformed in the HSIF markets, and play an important role in price discovery. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:156–174, 2010     

Market microstructure of FT-SE 100 index futures: An intraday empirical analysis

This article examines the market microstructure of the FT-SE Index futures market by analyzing the intraday patterns of bid-ask spreads and trading activity. The patterns are remarkably different from those of stock and options markets because of the futures market's open outcry system with frenzied scalpers/short-term marketmakers. Spreads are stable over the day, but decline sharply at the close and increase when U.S. macroeconomic news is distributed. Traders actively trade at the open with narrow spreads and large trade sizes. Volatility and volume have higher values at the open and close and when U.S. news is released. The overall results suggest that information asymmetry in the index futures market is insignificant, and traders find it easy to control inventory. The results are also broadly consistent with the Grossman and Miller (1988) model that describes liquidity as the price of transaction demand for immediacy. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 31–58, 1999     

Trading and information in futures markets

This paper studies the trading behavior of different types of traders (customer type indicators [CTI's]) in corn futures. Nonmembers (CTI4) consume most of the intraday liquidity while local traders (CTI1) as market makers are its main provider. Both groups combine most of the intraday trading volume. Interday trading comes mainly from proprietary accounts (CTI2) and other local traders' trades (CTI3), reflecting their longer-term needs for hedging and speculation. Changes in the overnight positions of the general public (CTI4) and clearing members (CTI2) contribute mostly to daily price discovery, while the positions of CTI3 group reflect possible information advantage about future price movements.     

Return dynamics during periods of high speculation in a thinly traded commodity market

This article studies the effects of speculation in a thinly traded commodity futures market, paying particular attention to periods characterized by high-speculative activity of long–short speculators. Using the speculation ratio as a daily measure for long–short speculation, we employ generalized autoregressive conditional heteroscedasticity regressions to study its impact on return dynamics. Our results for the Chicago Mercantile Exchange feeder cattle futures market suggest that futures returns are predominantly explained by fundamentals, but their volatility is significantly driven by the speculation ratio. This relationship holds for periods of high- and low-speculative activity alike.     

Asymmetric information in commodity futures markets: Theory and empirical evidence

This article examines the theoretical and empirical implications of asymmetric information in commodity futures markets. In particular, it formulates and tests a theoretical model that recognizes two distinct categories of traders: hedgers, who participate in both spot and futures markets, and speculators, who participate only in the futures market. Speculators are assumed to possess differential information about the realized values of selected random variables. Multiperiod futures market equilibria are derived under competitive conditions, and the ability of futures markets to forecast changes in equilibrium spot market prices are examined. The key variable is shown to be the randomness and informational asymmetry in the aggregate supply by participating hedgers in the spot market, whose absence turns out to be the major determinant of the revelation of informational asymmetry. Moreover, under the assumption of independence of error forecasts for prices and spot market supplies, it is shown that futures market equilibrium ends up with linear expressions for prices and futures contract volumes. These linear expressions are then used to develop empirically testable models. The main empirical implications in these models revolve around the role of the basis as a predictor of future spot price changes. The paper provides an empirical investigation of these implications, using three commodities traded on the Winnipeg Commodity Exchange (WCE). © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:803–825, 1998     

Investor Sentiment and Return Predictability in Agricultural Futures Markets

This study examines the usefulness of trader‐position‐based sentiment index for forecasting future prices in six major agricultural futures markets. It has been found that large speculator sentiment forecasts price continuations. In contrast, large hedger sentiment predicts price reversals. Small trader sentiment hardly forecasts future market movements. An investigation was performed into various sentiment‐based timing strategies, and it was found that the combination of extreme large trader sentiments provides the strongest timing signal. These results are generally consistent with the hedging‐pressure theory, suggesting that hedgers pay risk premiums to transfer nonmarketable risks in futures markets. Moreover, it does not appear that large speculators in the futures markets possess any superior forecasting ability. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:929–952, 2001     

A Study of Arbitrage Efficiency Between the FTSE‐100 Index Futures and Options Contracts

Despite the importance of the London markets and the significance of the relationship for market makers, little published research is available on arbitrage between the FTSE‐100 Index futures and the FTSE‐100 European index options contracts. This study uses the put–call–futures parity condition to throw light on the relationship between options and futures written against the FTSE Index. The arbitrage methodology adopted in this study avoids many of the problems that have affected prior research on the relationship between options or futures prices and the underlying index. The problems that arise from nonsynchroneity between options and futures prices are reduced by the matching of options and futures prices within narrow time intervals with time‐stamped transaction data. This study allows for realistic trading and market‐impact costs. The feasibility of strategies such as execute‐and‐hold and early unwinding is examined with both ex‐post and ex‐ante simulation tests that take into consideration possible execution time lags for the arbitrage trade. This study reveals that the occurrence of matched put–call–futures trios exhibits a U‐shaped intraday pattern with a concentration at both open and close, although the magnitude of observed mispricings has no discernible intraday pattern. Ex‐post arbitrage profits for traders facing transaction costs are concentrated in at‐the‐money options. As in other major markets, despite important microstructure differences, opportunities are generally rapidly extinguished in less than 3 min. The results suggest that arbitrage opportunities for traders facing transaction costs are small in number and confirm the efficiency of trading on the London International Financial Futures and Options Exchange. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:31–58, 2002     

Trader Survival: Evidence from the Energy Futures Markets

This study analyzes the adaptation of traders and the determinants of trader survival during a period of changing market structures. Our unique sample of transactions level data covers the introduction of electronic trading in the NYMEX energy futures market. The results show that most floor traders adapted to the side‐by‐side electronic and open outcry trading, although trader attrition increased and the profitability of surviving traders declined dramatically. It is also found that trading profits, trader experience and sophistication, and dual trading have a positive effect on the probability of trader survival. Scalpers are less likely to exit trading in pure open outcry trading, but are more likely to fail than traders who hold open positions longer in side‐by‐side trading. Finally, traders trading in multiple energy futures markets and those who use both the exchange floor and electronic trading appear to have a survival advantage in side‐by‐side trading. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark 32:809–836, 2012     

Risky short positions and investor sentiment: Evidence from the weekend effect in futures markets

This paper examines the weekend effect in futures markets and presents rational and behavioral reasons for its existence. Specifically, we document a weekend effect (Friday's return minus the following Monday's return) in futures markets. The weekend effect occurs partly because of asymmetric risk between long and short positions around weekends; the weekend effect increases when short positions are relatively more risky. In addition, we find that both lagged and contemporaneous changes in investor sentiment are related to the weekend effect. These results are consistent with the investor sentiment literature that finds that mood improves on Fridays but deteriorates on Mondays.     

The intra‐day price discovery process between the Singapore Exchange and Taiwan Futures Exchange

This paper focuses on the increasing competition between exchanges for listing similar index futures contracts and the impact this has on information dissemination between various markets. Specifically, using both the Hasbrouck and Gonzalo–Granger methodologies for extracting the information content held in each market, a comparison of information efficiencies between the Singapore Exchange and the Taiwan Futures Exchange is examined for Taiwan Index Futures listed in both markets. The results show not only a common stochastic trend between index futures and their underlying indices, but also provide strong evidence to suggest price discovery primarily originates from the Singapore futures market. There are direct implications of this result for both financial exchanges and traders—in particular, that traders realize price determination can arise from both futures markets, and the need for exchanges to maintain a reputation as an information center for these similarly traded financial instruments. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 219–240, 2002     

Open interest,cross listing,and information shocks

This study examines the characteristics and behavior of the demand for hedging, proxied by open interest, for the cross‐listed Euribor futures contract traded at Euronext‐LIFFE and Eurex. The study is unique in its investigation of the simultaneous determinants of open interest in a cross‐listed setting. It also assesses the impact of shocks on traders' demand for hedging and shows how the 9/11 terrorist attacks and the credit crunch influence the level of dependency between Euronext‐LIFFE and Eurex. Differences of opinion, ECB Governing Council meetings, days of the week, contract maturity, illiquidity, and volatility are investigated as potential determinants of open interest. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:755–778, 2011     

The behavior and performance of major types of futures traders

This article examines the behavior and performance of speculators and hedgers in 15 U.S. futures markets. We find that after controlling for market risk factors, speculators are contrarians, but respond positively to market sentiment. In contrast, hedgers engage in positive feedback trading and trade against market sentiment. We also find that trades of speculators (hedgers) are positively (negatively) correlated with subsequent abnormal returns; however, it does not appear that speculators possess superior forecasting power. Therefore, hedging pressure effects likely explain the negative relation between the performance of speculators and hedgers. The positive feedback trading by hedgers together with their negative performance suggests that hedgers have a destabilizing impact on futures prices. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:1–31, 2003     

Learning representation of stock traders and immediate price impacts

We use 239-day trading-level data for a stock on the Shanghai Stock Exchange, including about 440,000 traders and 1.77 million trading relationships, to study the representation of traders in a trading network using the network representation learning method, and to identify different traders' local outlier factor (LOF). Based on the local outlier factors, traders are divided into two categories: novel and normal. The novel traders' orders have smaller immediate price impact. Our method can be used to characterize and discover the behavior of medium-scale trading networks and provide certain decision support for market investors and regulators.     

Predictive abilities of speculators in energy markets

Using nonparametric methodology, I find that speculators are successful in taking profitable positions in energy futures markets, although the magnitude of this effect is lower than that found previously for agricultural markets. A plausible explanation for this difference is that price forecasting is more difficult for energy commodities. Moreover, I find that the energy speculators’ returns are due to the existence of the risk premiums rather than to speculators’ forecasting abilities. Futures risk premium is highly time-variant; notably, energy investors’ profits have been very limited in the GFC and post-GFC period, which coincided with the financialization of commodity markets.