Persistence of volatility in futures markets

This article examines the characteristics of key measures of volatility for different types of futures contracts to provide a better foundation for modeling volatility behavior and derivative values. Particular attention is focused on analyzing how different measures of volatility affect volatility persistence relationships. Intraday realized measures of volatility are found to be more persistent than daily measures, the type of GARCH procedure used for conditional volatility analysis is critical, and realized volatility persistence is not coherent with conditional volatility persistence. Specifically, although there is a good fit between the realized and conditional volatilities, no coherence exists between their degrees of persistence, a counterintuitive finding that shows realized and conditional volatility measures are not a substitute for one another. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:571–594, 2006     

Stock index futures trading and volatility in international equity markets

This article examines stock market volatility before and after the introduction of equity‐index futures trading in twenty‐five countries, using various models that account for asynchronous data, conditional heteroskedasticity, asymmetric volatility responses, and the joint dynamics of each country's index with the world‐market portfolio. We found that futures trading is related to an increase in conditional volatility in the United States and Japan, but in nearly every other country, we found either no significant effect or a volatility‐dampening effect. This result appears to be robust to model specification and is corroborated by further analysis of the relationship between volatility, trading volume, and open interest in stock futures. An increase in conditional covariance between country‐specific and world returns at the time of futures listing is also documented. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:661–685, 2000     

Persistence in some energy futures markets

In this study, we examine the possibility of long‐range dependence in some energy futures markets for different maturities. In order to test for persistence, we use a variety of techniques based on non‐parametric, semi‐parametric and parametric methods. The results indicate that there is little or no evidence of long memory in gasoline, propane, oil and heating oil at different maturities. However, when we focus on the volatility process, proxied by the absolute returns, we find strong evidence of long memory in all the variables at different contracts. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:490–507, 2010     

Natural gas prices and the gas storage report: Public news and volatility in energy futures markets

This study examines the short‐term volatility of natural gas prices through an examination of the intraday prices of the nearby natural gas futures contract traded on the New York Mercantile Exchange. The influence on volatility of what many regard as a key element of the information set influencing the natural gas market is investigated. Specifically, we examine the impact on natural gas futures price volatility of the Weekly American Gas Storage Survey report compiled and issued by the American Gas Association during the period January 1, 1999 through May 3, 2002 and the subsequent weekly report compiled and issued by the U.S. Energy Information Administration after May 6, 2002. We find that the weekly gas storage report announcement was responsible for considerable volatility at the time of its release and that volatility up to 30 minutes following the announcement was also higher than normal. Aside from these results, we document pronounced price volatility in this market both at the beginning of the day and at the end of the day and offer explanations for such behavior. Our results are robust to the manner in which the mean percentage change in the futures price is estimated and to correlation of these changes both within the day and across days. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:283–313, 2004     

Mid-day volatility spikes in U.S. futures markets

Recent work offers mixed results regarding the nature of intraday volatility patterns in futures markets and, specifically, the existence of spikes in futures return volatility during the middle of the U.S. trading day (Crain & Lee, 1995; Kawaller, Koch, & Peterson, 1994). This note analyzes time and sales data on two markets—Eurodollar futures and deutsche mark futures—to investigate the existence of such spikes, and to examine the nature of changes in intraday volatility patterns over time. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 195–216, 1999     

Stock index futures markets: stochastic volatility models and smiles

This study examined whether the inclusion of an appropriate stochastic volatility that captures key distributional and volatility facets of stock index futures is sufficient to explain implied volatility smiles for options on these markets. I considered two variants of stochastic volatility models related to Heston (1993). These models are differentiated by alternative normal or nonnormal processes driving log‐price increments. For four stock index futures markets examined, models including a negatively correlated stochastic volatility process with nonnormal price innovations performed best within the total sample period and for subperiods. Using these optimal stochastic volatility models, I determined the prices of European options. When comparing simulated and actual options prices for these markets, I found substantial differences. This suggests that the inclusion of a stochastic volatility process consistent with the objective process alone is insufficient to explain the existence of smiles. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:43–78, 2001     

Price discovery and volatility spillovers in the DJIA index and futures markets

The Dow Jones Industrial Average (DJIA) is the most widely quoted stock index worldwide. This article examines the minute-by-minute price discovery process and volatility spillovers between the DJIA index and the index futures recently launched by the CBOT. The Hasbrouck (1995) cointegrating model suggests that most of the price discovery takes place at the futures market. However, by examining the volatility spillovers between the markets based on a bivariate EGARCH model, a significant bidirectional information flow is found. That is, innovations in one market can predict the future volatility in another market, but the futures market volatility-spillovers to the stock market more than vice versa. Both markets also exhibit asymmetric volatility effects, with bad news having a greater impact on volatility than good news. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 911–930, 1999     

Intradaily periodicity and volatility spillovers between international stock index futures markets

This paper examines short‐run information transmission between the U.S. and U.K. markets using the S&P 500 and FTSE 100 index futures. Ultrahighfrequency futures data are employed—which have a number of advantages over the low‐frequency spot data commonly used in previous studies—in establishing that volatility spillovers are in fact bidirectional. The generalized autoregressive conditionally heteroskedastic model (GARCH) is employed to estimate the mean and volatility spillovers of intraday returns. A Fourier flexible function is utilized to filter the intradaily periodic patterns that induce serial correlation in return volatility. It was found that estimates of volatility persistence and speed of information transmission are seriously affected by intradaily periodicity. The bias in parameter estimation is removed by filtering out the intradaily periodic component of the transaction data. Contrary to previous findings, there is evidence of spillovers in volatility between the U.S. and U.K. markets. Results indicate that the volatility of the U.S. market is affected by the most recent volatility surprise in the U.K. market. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:553–585, 2005     

Intraday volatility in the bond,foreign exchange,and stock index futures markets

Intraday volatility for the Eurodollar, the Euro/dollar foreign exchange rate, and the E‐mini S&P 500 futures contracts traded on a continuous 23‐hour schedule on the Chicago Mercantile Exchange Globex electronic platform is studied. Volatility transmission in a single market across different regions is mainly explained by intraregion volatility (heat waves); interregion volatility (meteor showers) plays a secondary role. The joint impact of liquidity variables such as volume and open interest on volatility is also analyzed. Volume tends to increase volatility, but open interest does not affect it. The results are explained by the type of trading venue. Unlike floor‐based trading systems, in electronic markets open interest does not seem to provide additional information on market liquidity and its relation to volatility beyond any information contributed by volume. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:313– 334, 2008     

Noninformative and informative tests of efficiency in three energy futures markets

This article presents a critique of tests of market efficiency commonly applied to energy futures markets. Most of this literature fails to deal adequately with the endogeneity, nonstationarity, and cointegration characteristics of spot and futures prices, resulting in tests that are not informative about market efficiency. Consistent with this literature, application of these noninformative tests to spot and futures prices from three energy markets is generally not supportive of market efficiency. The article also presents two alternative tests of efficiency that properly deal with the stochastic features of these price series. Nonstationary data can be modeled with cointegration methods, allowing valid tests of the efficiency hypothesis. Alternatively, testing the equivalence of the data generation processes of the spot and futures prices provides an informative approach to efficiency testing with stationary data that does not suffer from endogeneity problems. Application of these two tests is largely supportive of weak and semistrong efficiency in three energy futures markets. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18: 939–964, 1998     

Intertemporal volatility and price interactions between Australian and Japanese spot and futures stock index markets

Previous studies have examined causality within and between different spot and futures markets with a motivation to discover market comovements, price leadership effects, and, more recently, volatility spillovers across markets. However, the empirical framework within which this is accomplished tends not to analyze explicitly foreign spillover effects upon a spot–futures relationship, which may significantly alter the equilibrium between these markets. This will then have a direct impact upon the estimation of dynamic risk adjustments that occur from the interaction between these markets. This article develops a quadvariate simultaneous-equation EC-ARCH model with an emphasis on volatility spillovers as a better alternative methodology to evaluate these relationships from a different perspective. This model is applied to examine the interaction between the Australian and Japanese spot and futures stock index markets, which allows for an Australian or Japanese futures trader to analyze the impact of foreign cash and futures markets, as well as the local cash market, on the local futures market in a single coherent framework. This type of analysis is not possible using previous paradigms, because they allow the trader only to examine the impact of local cash and foreign futures markets in separate settings. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 523–540, 1999