Measuring Pricing Inefficiencies Under Stressful Market Conditions

This study examines the mispricing and time between arbitrage trades of the Hong Kong Hang Seng index futures and index options contracts under various stressed market conditions. Ex‐ante trading profits and differences in time between trades across up and down as well as stressed and non‐stressed markets are used to measure how well the derivative markets perform under emotional distress. We find evidence of illiquidity in stressed and down markets. In stressful markets and down markets, liquidity suppliers are less likely to trade against the informed traders. This, in turn, leads to longer time between trades and higher arbitrage profits.     

Reexamining intraday simultaneity in stock index futures markets

This note examines three empirical examples involving intraday dynamic relationships associated with stock index futures markets. Researchers often employ a vector autoregressive ( ) model to analyze such high frequency transactions data. While such a model can provide useful information regarding the nature of causal priority inherent in the data, it is not the proper model to investigate the structural relationships of interest, because it omits the contemporaneous interaction. On the other hand, a model specification which is altered to incorporate simultaneity may enable the data to reveal the structural relationships of interest.     

Hedging effectiveness of the Athens stock index futures contracts

This paper examines the hedging effectiveness of the FTSE/ATHEX-20 and FTSE/ATHEX Mid-40 stock index futures contracts in the relatively new and fairly unresearched futures market of Greece. Both in-sample and out-of-sample hedging performances using weekly and daily data are examined, considering both constant and time-varying hedge ratios. Results indicate that time-varying hedging strategies provide incremental risk-reduction benefits in-sample, but under-perform simple constant hedging strategies out-of-sample. Moreover, futures contracts serve effectively their risk management role and compare favourably with results in other international stock index futures markets. Estimation of investor utility functions and corresponding optimal utility maximising hedge ratios yields similar results, in terms of model selection. For the FTSE/ATHEX Mid-40 contracts we identify the existence of speculative components, which lead to utility-maximising hedge ratios, that are different to the minimum variance hedge ratio solutions.     

The relative pricing of European dividend futures and their predictive abilities for index returns

We use dividend futures prices to derive a dividend future discount model. Arbitrage arguments postulate that the sum of discounted dividend futures prices should equal the index price, i.e. the sum of discounted dividends. We analyze whether this relation holds and find that the two valuation approaches lead to a different valuation of expected dividends. These observations indicate that dividend futures and index prices seem to provide the investor with different information on future dividends. We further show that the difference in valuation can be used to forecast index returns and show how an investment strategy can exploit this predictability.     

Index arbitrage and the pricing relationship between Australian stock index futures and their underlying shares

This paper examines the mispricing of Australian stock index futures. Exogenous and endogenous price volatility is confirmed to have a positive impact on the mispricing spread, after filtering out predictable time series components. More accurate pricing associated with surprise trading volume in the underlying stocks is consistent with arbitrageurs acting to narrow price disparities relative to the futures market. Ex‐ante interest rate volatility is the primary source of risk faced by arbitrageurs and fluctuations in the transaction cost of opening index arbitrage positions influence the extent to which they drive prices towards theoretical fair values.     

股指期货创新中的投资者保护探讨

股指期货的推出,在交易机制和违规行为等方面,均对投资者产生了一定影响,因此股指期货创新中的投资者保护应成为其应有之义。本文认为股指期货在杠杆交易、双向交易和到期日制度方面会对投资者造成一定影响;另外在信息敏感性和跨市场联动性等方面也会对投资者造成影响。当前股指期货市场对投资者保护主要从投资者适当性,风险揭示和保护基金三方面着力,有待扩展和深化。本文在借鉴美国、日本、香港等成熟股指期货市场投资者保护立法及实践的基础上,提出了完善我国股指期货投资者保护的一些建议。     

Feedback trading in stock index futures: Evidence from South Africa

This study tests whether investors and speculators in stock index futures contracts on the South African stock market use feedback trading strategies. Feedback trading can be destabilizing and impede on the risk mitigation and price discovery functions of futures contracts. Using the Sentana and Wadhwani (1992) model, and accounting for the global financial crisis, we find no evidence of feedback trading in the Top40 futures index or the Top40 mini futures index contracts. Our findings have important implications for investors who wish to use index futures to mitigate risk or exploit arbitrage opportunities and regulators concerned about the destabilizing effects of futures trading.     

Optimal hedge ratio and hedging effectiveness of stock index futures: evidence from India

In a free capital mobile world with increased volatility, the need for an optimal hedge ratio and its effectiveness is warranted to design a better hedging strategy with future contracts. This study analyses four competing time series econometric models with daily data on NSE Stock Index Futures and S&P CNX Nifty Index. The effectiveness of the optimal hedge ratios is examined through the mean returns and the average variance reduction between the hedged and the unhedged positions for 1-, 5-, 10- and 20-day horizons. The results clearly show that the time-varying hedge ratio derived from the multivariate GARCH model has higher mean return and higher average variance reduction across hedged and unhedged positions. Even though not outperforming the GARCH model, the simple OLS-based strategy performs well at shorter time horizons. The potential use of this multivariate GARCH model cannot be sublined because of its estimation complexities. However, from a cost of computation point of view, one can equally consider the simple OLS strategy that performs well at the shorter time horizons.     

我国股指期货与现货市场信息传递与波动溢出关系研究

股指期货与现货市场关系是监管者关注的重点问题。本文采用我国股指期货上市以来1分钟级高频数据,应用向量误差修正模型、方差分解、多元T-GARCH等,考察期现两市信息传递、波动溢出效应的影响。实证结果表明,尽管股指期货和股票市场之间短期内存在相互引导关系,但股票市场价格变动更多来自于自身影响,起主导作用,而且两市长期均衡收敛也是以股票市场占主导地位;两市存在显著的双向波动溢出,期货市场的波动溢出效应强于股票市场的波动溢出效应;两市场存在明显的非对称效应,期货市场对坏消息更为敏感,而现货市场对好消息更为敏感。     

Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico

This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.     

Restrictions on Short-Selling and Spot-Futures Dynamics

Recent lifting of short-sales constraints in Hong Kong provides an important opportunity to examine whether such restrictions affect the dynamic relationship between index futures and its underlying spot. The results show that the two prices have become more closely integrated without the restrictions. Adjustments to long-run equilibrium are accomplished more through index futures; however, the spot index has played an increasingly more important role in the lead-lag relationship after the deregulation. Market conditions, spot trading volumes, relative futures trading volumes and institutional participation also affect the dynamic relationship.     

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.     

Price discovery in spot and futures markets: a reconsideration

We reconsider the issue of price discovery in spot and futures markets. We use a threshold error correction model to allow for arbitrage opportunities to have an impact on the return dynamics. We estimate the model using quote midpoints, and we modify the model to account for time-varying transaction costs. We find that (a) the futures market leads in the process of price discovery and (b) the presence of arbitrage opportunities has a strong impact on the dynamics of the price discovery process.     

沪深300指数与股指期货价格变化关系的检验

在沪深300股指期货推出两年以后,为了验证期货市场的价格发现功能,本文利用VAR模型对沪深300股指期货和现货价格的每分钟收益率序列实际数据进行检验.实证检验结果显示期货价格变化对未来现货价格变化有显著影响,持续时间可达5分钟以上,而现货价格对期货价格变化没有显著影响.因此,沪深300指数期货市场已经发挥了较强的价格发现功能.同时,我们发现对股指期货和现货市场而言,VAR模型具有较强的稳定性,在利用历史数据预测未来指数价格变化中有较强的实用价值.     

沪深300股指期货与现货指数的引导关系研究

以沪深300现货指数和当月沪深300股指期货连续合约的1分钟高频数据为样本,将数据分为上涨与下跌两个阶段,采用Granger因果检验、VAR模型、脉冲响应函数、方差分解和VEC模型对期货指数与现货指数的引导关系进行实证分析。研究发现在下跌阶段期货指数领先于现货指数,对现货指数有很强的引导作用,而期货指数的变动更多来源于自身滞后期的波动。在上涨阶段期货指数与现货指数互为格兰杰因果关系,两个指数之间存在很强的协同性,相互之间都具有很强的引导作用。     

Investor sentiment‐styled index in index futures market

In this paper, we define and analyze the sentiment‐styled index for the CSI 300 index futures in the Chinese futures market. Our sentiment‐styled index for the CSI 300 index futures from April 16, 2010 to April 30, 2019 is constructed by the first and second principal component analyses, rather than only by the first principal component analysis used in the Baker and Wurgler (Journal of Finance 61(4): 1645–1680, 2006) method. The sentiment‐styled index explains 78.38% of the sample variance. The vector error correction model is adapted to study the dynamics of cointegration of the sentiment‐styled index and the logarithmic futures price. We use the GARCH‐DCC model to illustrate the spillover effect between the sentiment‐styled index and the Chinese futures market. We show that this investor sentiment‐styled index does have the price discovery from the Granger causality and common factor weights and the hedging function from the Baba–Engle–Kraft–Kroner model empirically; furthermore, we use the curvature term of the sentiment‐styled index to determine the multiple unit roots. More empirical results for the sentiment‐styled index of the Chinese stock market, the sentiment‐styled index of the CSI 300 index futures, and the return of the CSI 300 index futures market are studied in this paper.     

The relationship between returns and unexpected earnings: A global analysis by accounting regimes

Numerous studies have documented a long-term association between earnings and returns. Surprisingly, few attempts have been made to internationally examine market reactions to earnings releases over return windows less than 12 months. This paper globally explores the market reaction to unexpected earnings defined by both the change in earnings per share (EPS) and analyst forecast errors (AFE) using a 1-month return window. First, the existence of the earnings-returns relationship is examined using a sample of firms from 32 countries grouped into accounting regimes. Accounting regimes represent groups of countries that exhibit similarities in accounting standards, stock market characteristics, corporate governance mechanisms, and economic conditions. Thus, similar reactions to earnings are expected within regimes. Next, the incremental information content of analyst forecasts, a proxy for investors’ earnings expectations, is examined. Finally, changes in the structure of the earnings-returns relationship over time are investigated. Results support the existence of a relationship between earnings and returns in all accounting regimes. In addition, analyst forecast errors appear to be incorporated into earnings expectations in most developed countries. Finally, evidence suggests that the significance and explanatory power in the earnings-returns relationship has increased in recent years.     

Stock index dynamics and derivatives pricing with stochastic interest rates

The paper analyzes the equilibrium valuation of stock index derivatives in an economy with stochastic interest rates and with a representative agent having time-additive power utility. The equilibrium short interest rate dynamics and the equilibrium term structure of interest rates are described by an affine one-factor term structure model. In equilibrium the value of the stock index is a non-trivial function of the short interest rate. The paper investigates the consequences of the induced stock index dynamics for the theoretical spreads between index forward prices and index futures prices and the consequences for the valuation of options on stock index futures.The paper was written while the author was a visiting scholar at Department of Finance, Kellogg Graduate School of Management, Northwestern University. I thank for helpful comments and suggestions from Gurdip Bakshi, Avi Bick, Menachem Brenner (the editor), Zhiwu Chen, San-Lin Chung, Mark Fisher, Andreas Höger, Marti Subrahmanyam, two anonymous referees, and participants at the Western Finance Association meeting in San Diego, the European Financial Management Association meeting in Istanbul, the European Finance Association meeting in Vienna, and the Center of Analytical Finance workshop at University of Aarhus. Financial support from the Danish Natural Science and Social Science Reasearch Councils is gratefully acknowledged.     

The non-linear relationship between oil prices and stock prices: Evidence from oil-importing and oil-exporting countries

This paper investigates the long-run dynamics between stock and oil prices over the period from March 13, 2001 to August 25, 2017 using the Rafailidis and Katrakilidis (2014) approach, which includes the structural breaks in the relationship between the variables in a Dynamic Ordinary Least Squares model. The approach verifies the existence of cointegration and asymmetry. The main results indicate that when using nonlinear approaches, we can find cointegration and asymmetry. For oil-exporting countries, a positive long-term relationship was found between oil and stock prices. In this case, the wealth effect prevailed for these countries. For oil-importing countries with developed economies, a negative signal was found, confirming that in these economies the business cost channel prevailed. However, oil-importing countries with emerging economies have experienced a positive sign in the long-term relationship, probably due to the economic cycle. In addition, only the United States has seen asymmetric adjustments in the long-term relationship between oil and stock prices.     

Non-linear dependence and conditional heteroscedasticity in stock returns evidence from the norwegian thinly traded equity market

Abstract

The paper investigates the presence of non-linear dependencies in stock returns for the Norwegian equity market as it is very difficult to interpret the unconditional distribution of stock returns and its economic implications if the i.i.d. assumption is violated. Standard tests of non-linear dependence give strong evidence for the presence of non-linearity in raw returns. Modelling non-linear dependence must distinguish between models that are non-linear in mean and hence depart from the Martingale hypothesis, and models that are non-linear in variance and hence depart from independence but not from the Martingale hypothesis. Therefore, three non-linear models of asset returns are formulated applying ARMA-GARCH specifications for the conditional mean and variance equations. The paper goes on to answer which model has the necessary characteristics that are sufficient to account for most of the non-linear dependence. In the Norwegian equity market most of the non-linear dependence seems to be conditional heteroscedasticity. However, the most thinly traded assets still report significant non-linear dependence for all non-linear specifications. These results imply that the independence hypothesis can be rejected for all assets, portfolios and indices. Moreover, for thinly traded assets the Martingale hypothesis can also be rejected. The economic implications from the unconditional distributions of thinly traded assets are therefore very difficult to interpret and are unfamiliar territory for those who are accustomed to thinking analytically, intuitively and linearly.