Using high, low, open, and closing prices to estimate the effects of cash settlement on futures prices |
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Authors: | Leo ChanDonald Lien |
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Affiliation: | a Department of Business Economics, College of Wooster, Wooster, OH 44691, USA b Department of Economics, University of Texas-San Antonio, 6900 North Loop 1604 West, San Antonio, TX 78249, USA |
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Abstract: | Due to dwindling commercial interest in the feeder cattle futures contract, the Chicago Mercantile Exchange (CME) decided to replace the contract's physical delivery provision with a cash settlement provision, arguing that cash settlement would help reduce price volatility and attracts more commercial interests. In this article, we apply stochastic volatility models to investigate the CME conjecture, using four different estimators based on opening, high, low, and closing prices, respectively. With each estimator, we find that the volatility of the feeder cattle futures price decreases after the implementation of cash settlement. We conclude that the change in the contract specification enhances price discovery and the contract's hedging performance. |
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Keywords: | Feeder cattle futures contract Cash settlement Stochastic volatility model Quasi-maximum likelihood |
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