Round-the-clock market efficiency and home bias: Evidence from the international Japanese government bonds futures markets

This paper examines how information is processed between almost identical international futures markets: London (LIFFE) and Tokyo (TSE) JGB futures. In these markets, variations in open-to-open changes are virtually the same as those of close-to-close changes, suggesting that information is transmitted efficiently across markets with small opening pricing errors. The overall results confirm market efficiency around the clock, yet the intraday U-shaped patterns in volume/volatility of the London JGB futures suggest home bias in international investments, indicating a less global view of trading than expected. Specifically, at the LIFFE open, London investors rush to rebalance portfolios instead of doing so at the TSE close, which is only one hour before the LIFFE opens.     

The role of speculation in international futures markets on commodity prices

The role of futures contracts on spot prices has been one of the key focus areas of research since the recent surge in commodity prices and increase in the volatility of commodity returns. However, no consensus arises from this literature, and hence it is difficult to link the use of futures contracts in agricultural commodities by non-hedgers and the growing food insecurity within developing countries. The purpose of this paper is to highlight causal relationships from futures contracts to spot prices of underlying assets, namely agricultural commodities. As research that focus on exchange-traded funds do not provide any clear conclusions, we focus on the imbalance between short- and long-open positions, this imbalance being caused by the exchange traded funds’ participation in futures markets. In this paper, we estimate relationships between financial variables including indicators for speculation in futures markets and the returns of cocoa, corn, soybean, wheat, coffee, rice, and sugar on a weekly basis from 1998 to 2013. Significant results lead to Granger-causality tests that in turn validate the hypothesis of a positive impact of speculation in futures markets to returns on the underlying commodities.     

投资者结构与期限结构对期货市场效率的影响研究

有效市场假设认为,投资者不能通过任何信息的获取而获得超额收益,即价格能够及时地反映所标资产的相关信息和风险。通过对上海期货市场金融危机前后交易数据的检验,发现其存在显著的长期惯性利润,证明了其不符合有效市场假设和可能存在市场操纵行为。Granger因果检验进一步发现短期的投机行为越多惯性利润越低,长期惯性利润越高投机行为越多。因此上海期货市场有必要通过减少交易成本和提供更多的交易信息去改善市场结构和效率。     

Evidence on the arbitrage efficiency of SPI index futures and options markets

This paper is concerned with arbitrage opportunities in the futures and futures option contracts traded on the Sydney Futures Exchange (SFE) within a put-call-futures-parity (PCFP) framework. Tick-by-tick transaction price data are employed so that the futures contracts, the call futures options and the put futures options can be matched within a one-minute interval. This paper also takes into account the realistic transaction costs that an arbitrager has to incur, including the implicit bid-ask spread. A thorough ex post analysis is first carried out. The results reveal a significant number of violations of the PCFP in the sample. Ex ante tests are then conducted whereby ex post profitable arbitrage strategies, signified by the matched trios of futures, put and call contracts, are executed with lags up to 3 min. The ex ante results are similar to the ex post results. However, further analysis reveals that the exploitability of the identified arbitrage opportunities is very limited due to the small trading volumes of the futures and options contracts. Thus, we conclude that there is no strong evidence against the arbitrage efficiency between the SPI index futures and options markets in Australia.      

Limited disclosure and hidden orders in asset markets

Opacity assumes at least two prominent forms in asset markets. Dark exchanges and over-the-counter markets enable expert investors to hide their orders while originators carefully control the disclosure of fundamental information about the assets they source. We describe a simple model in which both forms of opacity – hidden orders and limited disclosure – complement one another. Costly investor expertise gives originators incentives to deliver assets of good quality. Keeping expert orders hidden generates the rents investors need to justify investing in expertise in the first place. Limiting disclosure mitigates the resulting adverse selection issues. Originators prefer to restrict the information they can convey to experts because it encourages the participation of non experts. This optimal organization of asset markets can be decentralized using standard financial arrangements.     

Profitability of return and sentiment-based investment strategies in US futures markets

Our study adds to the literature by providing initial evidence on the interaction between short-horizon return predictability and investors’ sentiment by traders’ types on US commodity futures market. We find that the short-term contrarian profit is more associated with an increase rather than a decrease in hedgers’ sentiment. However, the interaction between lagged return and past change in speculators’ sentiment illustrates that the short-term contrarian profit is more associated with a decrease rather than an increase in sentiment. Based on behavioral finance theories, we conclude that hedgers behave like irrational traders while speculators behave like rational ones. Using Chou et al. (2007) decomposition, our results confirm the obtained relations between change in trader's sentiment and the overreaction. By expanding this decomposition, we find that the winners’ portfolio tends to more overreact with futures specific information. Also, the cross-autocorrelation between winners and losers and between losers and winners can represent another source of contrarian profits.     

Order book characteristics and the volume–volatility relation: Empirical evidence from a limit order market

Using unique data, we address the issue of price formation in a limit order market. A standard volume–volatility relation is documented with the number of trades acting as the important component of volume. The main contribution of the paper is to identify strong evidence that volume, volatility, and the volume–volatility relation are negatively related to the order book slope. These results are robust to the inclusion of several liquidity measures. A significant empirical relationship between the order book slope and the coefficient of variation in earnings forecasts by financial analysts suggests that the slope is proxying for disagreement among investors. Hence, our results support models where investor heterogeneity intensifies the volume–volatility relation.     

Price discovery in foreign exchange markets: A comparison of indicative and actual transaction prices

In this paper, we compare four months of Reuters EFX high frequency indicative data with D2000-1 inter-dealer transaction data for DEM/USD and GBP/USD. Contrary to previous studies, we find, using various information measures, that the matched tick-by-tick indicative data bear no qualitative difference from the transaction data, and have higher information content. Expanding the system to include order flow, due to its growing importance in exchange rate theory, we find that indicative data has a similar impact on order flow as transaction data. However, order flow has no impact on either price.     

进一步规范和发展我国期货市场的思考

目前,我国期货市场逐步进入规范发展的新阶段,处于从量的扩张向质的提升转变的关键时期。本文结合我国期货市场实际,从加快制定《期货法》、构建全国统一的期货市场结算体系、统一商品期货套期保值规则、扩大期货市场的对外开放、推进期货公司业务创新、建设外汇期货市场、加强期货居间人管理等七个方面进行了深入分析,提出了进一步规范和发展我国期货市场的建议。     

Price limits in futures markets: effects on the price discovery process and volatility

Price limits are actively employed by many futures exchanges as a regulatory mechanism directed at reducing volatility and improving price discovery process. The aim of this paper is to investigate whether price limits achieve these goals without affecting market liquidity for a number of agricultural futures contracts. We employ models of changing volatility in order to show that price limits do not appear to significantly reduce market volatility. In addition, we find evidence confirming the hypothesis that price limits delay price discovery instead of facilitating it. Our results also suggest that the impact of price limits on volatility and price reversals, found in previous studies, are mainly due to the properties inherent to the futures returns, such as volatility clustering. Finally, although trading decreases significantly due to the price limits, traders do not seem to switch from the contracts affected by price limits to other maturities in order to minimize the impact of circuit breakers.     

沪深300指数期货价格随机利率效应研究

经典持有成本模型在非随机利率假设无法满足的条件下仅仅是远期合约而非期货的定价模型。本文采用拟合SHIBOR曲线的方法生成无风险纯折现债券模拟价格序列,对沪深300指数期货价格的随机利率效应进行了实证检验。研究结果表明,由于利率管制、股指期货市场和货币市场发展不成熟等因素的共同作用,沪深300指数期货价格中不含随机利率效应,指数远期和期货理论价格相等;如果持有成本模型其他假设条件也得到满足,则该模型可以用于沪深300指数期货定价。     

An empirical investigation of trading on asymmetric information and heterogeneous prior beliefs

The purpose of this study is to identify and analyze inter-temporal trading patterns attributable to informed trading. Recent theoretical models posit that heterogeneous prior beliefs provide a source of trading volume in addition to the commonly accepted trading motives of liquidity and asymmetric information. After separating informed from uninformed trading using the estimation procedure of Easley et al. [Journal of Finance 51 (1996) 1405], we test for the presence of trading on heterogeneous beliefs as opposed to asymmetric information. The empirical findings confirm the existence of trading on heterogeneous prior beliefs and generally support the inter-temporal patterns proposed by Wang [Journal of Financial Markets 1 (1998) 321].     

Macroeconomic releases and the interest rate term structure

We extract two systematic economic factors from a wide array of noisy and sparsely observed macroeconomic releases, and link the dynamics and market prices of the two factors to the interest rate term structure. The two factors predict 77.9–82.1% of the daily variation in LIBOR and swap rates from one month to 10 years. Shocks on inflation-related releases have large, positive impacts on interest rates of all maturities, leading to parallel shifts of the yield curve, but shocks on output-related releases have larger impacts on the short rate than on the long rate, thus generating a slope effect.     

Market integration and currency risk in Asian emerging markets

Most of the Asian emerging stock markets started to liberalize their markets in 1990s. In this paper, I examine whether those markets have become integrated with world stock market since the 1990s by estimating and testing a dynamic version of international CAPM (ICAPM) in the absence of purchasing power parity (PPP) using a parsimonious multivariate GARCH-in-Mean (MGARCH-M) approach. I also investigate to what extent the liberalization process has affected the cost of capital and price volatility for each market. The empirical results show that Philippines was segmented from the world stock market before its liberalization date, but no evidence of market segmentation is found for the other five markets (India, Korea, Malaysia, Taiwan, and Thailand) before their liberalization dates. However, all six markets have become integrated after opening up their markets to foreign investors. In addition, the estimated risk premia are lower after the liberalization, indicating that the liberalization process has reduced the cost of capital for their domestic firms. Moreover, there is no evidence of extra market volatility introduced by capital market liberalization, and on the contrary, the markets have become more stabilized through the liberalization process.     

期货交易活跃度、波动性与投资者结构关系的实证研究

本文将期货市场上的投资者分为个人与机构两类,基于白糖、优质强筋小麦和PTA三个期货品种的样本数据,探讨了交易结构和持仓结构对期货交易活跃度和期货价格波动性的影响规律。研究结果表明:期货交易活跃度主要受交易结构的影响,而期货价格波动大小主要受持仓结构的影响;根据最优的弹性二次模型结果,两者的弹性均呈现出边际递减的经济学变化规律。     

The international transmission of interest rate shocks: The Federal Reserve and emerging markets in Latin America and Asia

This paper analyzes the effects of changes in the U.S. Federal Reserve's Federal Funds rate on emerging countries' interest rates using high frequency (weekly) data. I also investigate how changes in the U.S. term structure affect short term rates' differentials. Other shocks include changes in the U.S. dollar–Euro exchange rate, changes in the international price of oil, risk ratings, and the degree of capital mobility. The results indicate that there is a strong and fairly rapid transmission of changes in the Federal Funds rate into interest rates in the Latin American countries in the sample. This effect is equally large in the Asian nations in the long run. The adjustment path is different across the two regions, however. Adjustment is very fast and cyclical in Latin America; it is gradual and slower in East Asia.     

Market structure and rating strategies in credit rating markets – A dynamic model with matching of heterogeneous bond issuers and rating agencies

This paper investigates the impact of rating agencies in a market with asymmetric information. In particular, the role of credit rating agencies as an intermediary between investors and bond issuers is discussed. We model this setting in a dynamic framework in which both rating agencies and bond issuers are of heterogeneous quality. Rating agencies can apply costly research technology to reveal the fundamental nature of bond issuers and engage in rating smoothing. We show that rating smoothing can compensate for low research quality, even though it is accompanied by a quality deterioration in the rating market and market clustering. Moreover, low-quality bond issuers have a general tendency to match with low-quality rating agencies. If investors place a strong emphasis on the reputation of rating agencies, rating markets also tend to be strongly clustered.     

Universal features of price formation in financial markets: perspectives from deep learning

Using a large-scale Deep Learning approach applied to a high-frequency database containing billions of market quotes and transactions for US equities, we uncover nonparametric evidence for the existence of a universal and stationary relation between order flow history and the direction of price moves. The universal price formation model exhibits a remarkably stable out-of-sample accuracy across a wide range of stocks and time periods. Interestingly, these results also hold for stocks which are not part of the training sample, showing that the relations captured by the model are universal and not asset-specific.

The universal model—trained on data from all stocks—outperforms asset-specific models trained on time series of any given stock. This weighs in favor of pooling together financial data from various stocks, rather than designing asset- or sector-specific models, as is currently commonly done. Standard data normalizations based on volatility, price level or average spread, or partitioning the training data into sectors or categories such as large/small tick stocks, do not improve training results. On the other hand, inclusion of price and order flow history over many past observations improves forecast accuracy, indicating that there is path-dependence in price dynamics.     

Tactical allocation in commodity futures markets: Combining momentum and term structure signals

This paper examines the combined role of momentum and term structure signals for the design of profitable trading strategies in commodity futures markets. With significant annualized alphas of 10.14% and 12.66%, respectively, the momentum and term structure strategies appear profitable when implemented individually. With an abnormal return of 21.02%, our double-sort strategy that exploits both momentum and term structure signals clearly outperforms the single-sort strategies. This double-sort strategy can additionally be utilized as a portfolio diversification tool. The abnormal performance of the combined portfolios cannot be explained by a lack of liquidity, data mining or transaction costs.