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     

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     

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     

Large trades and intraday futures price behavior

This study examines the effects of large trades executed by outside customer on the prices of futures contracts traded on the Chicago Mercantile Exchange. We find that, on average, large buyer-initiated trades have a larger permanent price impact (information effect) than large seller-initiated trades, whereas the opposite is found for the temporary price impact (liquidity effects) of large trades. These results are consistent with previous findings for block and institutional trades in equity markets. However, we also find that the information effects of large sells are larger than large buys in bearish markets, whereas the results are the reverse in bullish markets. The liquidity price effects of buys are larger than the liquidity price effects of sells in bearish markets whereas the reverse results hold in bullish markets. Our results are consistent with the hypothesis that the current economic condition is a key determinant of asymmetric price effects between large buys and large sells. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1147–1181, 2008     

Speculation and hedging in the currency futures markets: Are they informative to the spot exchange rates

This study presents an empirical analysis investigating the relationship between the futures trading activities of speculators and hedgers and the potential movements of major spot exchange rates. A set of trader position measures are employed as regression predictors, including the level and change of net positions, an investor sentiment index, extremely bullish/bearish sentiments, and the peak/trough indicators. We find that the peaks and troughs of net positions are generally useful predictors to the evolution of spot exchange rates, but other trader position measures are less correlated with future market movements. In addition, speculative position measures usually forecast price‐continuations in spot rates while hedging position measures forecast price‐reversals in these markets. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

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     

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     

Liquidity and macroeconomic management in emerging markets

Emerging markets have received considerable attention for foreign investment and international diversification due to the possibility of higher earnings and a low level of integration with global equity markets. These high returns often need to be balanced by the high liquidity costs of trading in illiquid emerging markets. Several studies have shown that central bank and government policies are significant determinants of market liquidity. We investigate the influence of monetary and fiscal policy variables on the market and firm level liquidity of eight emerging stock markets of Asia. Using four different (il)liquidity measures and nine macroeconomic variables, we find that changes in the money supply, government expenditure and private borrowing significantly affect stock market liquidity. Illiquidity is also strongly affected by the bank rate, short-term interest rate and government borrowing. We demonstrate that ‘crowding out’ and ‘cost of funds’ effects exist in these markets. Other major findings are that some markets are more sensitive to local macroeconomic news than world factors, the impact on size based portfolios largely depends on the instruments used by the central banks and government, the liquidity of the manufacturing sector is affected by changes in any policy variables, financial institutions are only influenced by monetary policy variables, and the service sector is least affected.     

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.     

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     

Small traders in currency futures markets

This study examines the interrelation between small traders' open interest and large hedging and speculation in the Canadian dollar, Swiss franc, British pound, and Japanese yen futures markets. The results, based on Granger‐causality tests and vector autoregressive models, suggest that small traders' open interest is closely related to large speculators' open interest. Small traders and speculators tend to herd, which means that small traders are long [short] when speculators are long [short] as well. Moreover, small traders and speculators are positive feedback traders whereas hedgers are contrarians. Regarding information flows, speculators lead small traders in three of the four currency futures markets. The results therefore suggest that small traders are small speculators who follow the large speculators, indicating that they are less well informed than the large speculators. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:898–913, 2011     

LIQUIDITY IN A BINOMIAL MARKET

We study the binomial version of the illiquid market model introduced by Çetin, Jarrow, and Protter for continuous time and develop efficient numerical methods for its analysis. In particular, we characterize the liquidity premium that results from the model. In Çetin, Jarrow, and Protter, the arbitrage free price of a European option traded in this illiquid market is equal to the classical value. However, the corresponding hedge does not exist and the price is obtained only in L² ‐approximating sense. Çetin, Soner, and Touzi investigated the super‐replication problem using the same supply curve model but under some restrictions on the trading strategies. They showed that the super‐replicating cost differs from the Black–Scholes value of the claim, thus proving the existence of liquidity premium. In this paper, we study the super‐replication problem in discrete time but with no assumptions on the portfolio process. We recover the same liquidity premium as in the continuous‐time limit. This is an independent justification of the restrictions introduced in Çetin, Soner, and Touzi. Moreover, we also propose an algorithm to calculate the option’s price for a binomial market.     

Liquidity Considerations in Estimating Implied Volatility

Option markets have significant variation in liquidity across different option series. Illiquidity reduces the informativeness of the price. Price information for illiquid options is more noisy, and thus the implied volatilities (IVs) based on these prices are more noisy. In this study, we propose weighting schemes to estimate IV, which reduce the importance attached to illiquid options. The two indexes using liquidity weights are SVIX, which is a spread‐adjusted volatility index, and TVVIX, which is a traded volume weighted VIX. We find SVIX outperforms TVVIX, the conventional schemes such as the traditional VXO, or vega weights, and volatility elasticity weights. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:714‐742, 2012     

Is there an illiquidity premium in frontier markets?

We perform a comprehensive examination of the role of stock-level liquidity in the cross-section of frontier market stock returns. Using several popular liquidity measures and a battery of asset pricing tests, we investigate the illiquidity premium in 22 countries for the years 1991–2019. Contrary to typical relationships in developed and emerging markets, we find no evidence of illiquidity premium in frontier equities. Our findings support the hypothesis that for countries not fully integrated with the global economy, the diversification benefits offset the illiquidity, which, in turn, proves less important.     

Stock return predictability of the cumulative abnormal returns around the earnings announcement date: Evidence from China

We find that cumulative abnormal returns adjusted by size, book-to-market, and momentum around the earnings announcement date (DGTW_CAR3 hereafter) significantly and positively predict stock returns in the 6-month period from May 2005 to October 2020 in the China's A-shares market. The monthly equally-weighted DGTW_CAR3 premiums are 0.47% and 0.67% after risk adjustment. Although stock price delay fails to fully account for the DGTW_CAR3 premium, we find that the DGTW_CAR3 premium is more significant for illiquid stocks and during periods with high investor sentiment. This result suggests that market inefficiency explains the DGTW_CAR3 premium. Further analysis shows that, in addition to earnings information, the optimism reflected in the management discussion and analysis section of the annual or half-year report also contributes to the DGTW_CAR3 premium. This finding implies that DGTW_CAR3 may contain new fundamental information that correlates significantly and positively with future stock performance. Finally, we find that the institutional ownership change of a stock associated with DGTW_CAR3 also significantly and positively predicts the stock's return, suggesting that institutional investors adjust their holdings according to DGTW_CAR3 and consequently influence the demand for the stock in the China's A-shares market.     

Hedging performance analysis of energy markets: Evidence from copula quantile regression

This study investigates hedging performance with respect to different market structures for energy-related commodities, including West Texas Intermediate crude oil, Brent crude oil, Chinese crude oil, and Heating oil. Copula quantile regression functions and the generalized autoregressive conditionally heteroscedasticity model are combined to analyze the nonlinear impact of dependence and the heterogeneous impact of market structure changes on hedging performance. Results show that hedging performance presents nonlinearity and market structure changes have surprisingly strong heterogeneous effects on the quantile hedge ratio, where bearish and bullish have lower hedge ratios than normal markets, which is captured better by Clayton copula quantile regression. Additionally, the trend of hedging effectiveness over different market structures also shows an inverted U shape. After changing data frequency or the types of futures contracts, the conclusions remain the same. Our empirical findings imply that hedgers are supposed to adjust the hedging number of futures according to market structure changes to hedge price risk effectively.     

Exchange risk premia and firm characteristics

This paper examines the presence and the determinants of exchange risk premia in stock returns using firm level data from South Korea. We conduct empirical asset pricing tests based on cross-sectional data sorted by firm characteristics such as firm size, liquidity, foreign ownership, and industry. Using alternative model specifications and exchange rate measures, our results support the hypothesis of a significant unconditional exchange risk premium in the Korean stock market at firm and industry levels. More specifically, we find that the exchange risk premium is directly related to firm liquidity and inversely related to firm size and foreign ownership.     

Does a sustainability risk premium exist where it matters the most?

Using a sample of ESG ratings, we examine the sustainability risk premium for developed and emerging markets between 2015 and 2019-end. Our results show that this premium is not empirically distinguishable in developed equity markets, whilst highly positive in the emerging ones. We further partition the emerging markets to comprehend whether country development and firm size have an impact on the sustainability risk premium. As uncovered, both factors play a significant role in the emergence of the risk premium. Consequently, larger corporations and advanced nations drive sustainability in the emerging markets and thus experience the financial benefits.     

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     

Cross-listing pursuit of unseasoned foreign firms after going public in the U.S.

We examine a company's cross-listing decision with a unique sample of unseasoned foreign firms that went public in the U.S. and later cross-listed abroad. We find that these firms are motivated by their pursuit of global growth opportunities in both the capital and product markets. They strategically bond with the U.S. market through their U.S. IPOs to signal their commitment to increased shareholder protection, which facilitates their future capital raising efforts. Their higher quality is evidenced with characteristics of larger firm size, larger issue size, being prominent in their home countries, underwritten by prestigious underwriters, with lower issue costs and greater analysts' coverage than their non-cross-listing peers. Further analysis shows a positive valuation effect and increased liquidity for their U.S. shares around the cross-listing event. Additional findings suggest that foreign issuers seek cultural or geographical proximity when they further cross-list abroad.