Narrow Results

We have examined the order book characteristics and market impact on the Korean stock index futures market (KOSPI 200 index futures). The distribution of order volumes generally follows power-law distribution. The estimated exponents are 1.9 for market order, 2.5 for limit order, and 2.1 for cancel order. This result is different from the case of stocks where the exponent of market order is larger than that of limit order. The order likelihood is distinctively high in every 50's of order volume, which implies the behavioral characteristics of human preference on round-up numbers. The distributions of bid–ask spread and the best quotes volume provide the evidence of the liquidity of KOSPI 200 index futures market. We have obtained the concave relationship between market impact and transaction volume as well. Finally, the market response behavior is observed regarding various transaction sizes. The size of market response is estimated to be proportional to the size of transaction. Also, the larger the transaction size is, the longer it takes to recover the stability from the impact triggered by transaction.

We provide a new way of hedging a commodity exposure which eliminates downside risk without sacrificing upside potential. The tool used is a variant on the equity passport option and can be used with both futures and forwards contracts as the underlying hedge instrument. Results are given for popular commodity price models such as Gibson-Schwartz and Black with convenience yield. Two different scenarios are considered, one where the producer places his usual hedge and undertakes additional trading, and the other where the usual hedge is not held. In addition, a comparison result is derived showing that one scenario is always more expensive than the other. The cost of these methods are compared to buying a put option on the commodity.

This paper extends and refines the Jarrow et al. (2006, 2008) arbitrage free pricing theory for bubbles to characterize forward and futures prices. Some new insights are obtained in this regard. In particular, we: (i) provide a canonical process for asset price bubbles suitable for empirical estimation, (ii) discuss new methods to test empirically for asset price bubbles using both spot prices and call/put option prices on the spot commodity, (iii) show that futures prices can have bubbles independent of the underlying asset's price bubble, (iv) relate forward and futures prices under bubbles, and (v) relate price options on futures with asset price bubbles.

We study the problem of dynamically trading futures in continuous time under a multifactor Gaussian framework. We present a utility maximization approach to determine the optimal futures trading strategy. This leads to the explicit solution to the Hamilton–Jacobi–Bellman (HJB) equations. We apply our stochastic framework to two-factor models, namely, the Schwartz model and Central Tendency Ornstein–Uhlenbeck (CTOU) model. We also develop a multiscale CTOU model, which has a fast mean-reverting and a slow mean-reverting factor in the spot asset price dynamics. Numerical examples are provided to illustrate the investor’s optimal positions for different futures portfolios.

As interest rate benchmarks move from LIBOR to overnight risk-free rates (RFR), it has become increasingly important for models to accurately capture the interest rate dynamics at the overnight tenor. Overnight rates closely track central bank policy rate decisions resulting, in highly discontinuous dynamics around scheduled meeting dates. In this paper, we construct a dynamic term structure model, which accounts for the discontinuous short-rate dynamics. We show that the model is able to jointly fit the overnight US policy rate, secured overnight financing rate (SOFR) and SOFR futures rates through the recent Fed hiking cycle. Comparing our model with a standard continuous time-homogeneous short-rate model, we find several indications that our model avoids the clear misspecification of the continuous model, in particular with regard to the short-rate dynamics around meeting dates of the Federal Open Market Committee (FOMC). Thiseffect begins to disappear as the term of the rates under consideration is increased, suggesting that diffusive dynamics are a reasonably accurate reflection of the evolution of market expectations embodied in longer-term interest rates.

This paper examines mispricing, volatility and parity on the Hang Seng Index (HSI) options and futures market. Most of the previous research has focused on futures contracts; we update this research and extend it by considering also option contracts. It is also important to examine these issues post 1997 Asian crisis. We find mispricing of HSI futures and option contracts if no transaction costs were considered. However, by incorporating transaction costs, the HSI futures are bounded within the arbitrage free region and most of the mispricing of the HSI options disappears. Additional tests on the mispricing series reveals that most of the derivative HSI contracts are positively autocorrelated and that the mispricing series for both derivative contracts are not identical among the different contract months. From our results we cannot conclude that there is causal relationship between the mispricing and the spot index volatility. Finally, our empirical results show that for HSI derivative contracts future and option parity holds, supporting our mispricing test that the HSI derivative market is efficient and has not been adversely affected by the Asian economic crisis.

This paper examines the dynamics of returns and order imbalances across the KOSPI 200 cash, futures and option markets. The information effect is more dominant than the liquidity effect in these markets. In addition, returns have more predictability power for the future movements of prices than order imbalances. Information seems to be transmitted more strongly from derivative markets to their underlying asset markets than from the underlying asset markets to their derivative markets. Finally, domestic institutional investors prefer futures, domestic individual investors prefer options, and foreign investors prefer stocks relative to other investor groups when they have new information.

Macro-hedging is one of the most important issues in hedging, but there are very few studies on the welfare impact of macro-hedging. To bridge a gap in the literature of macro-hedging, this paper introduces a method that generalizes and extends existing models of macro-hedging in several significant ways. We first assume the existence of basis risk in a small country to hedge in futures markets instead of forward contracts and relax the full-hedging assumption. We use the quantity being hedged in futures contracts as a decision variable. We also relax the restrictive assumption regarding the form of the spot price. We then derive the formula to estimate the welfare gain which can be easily implemented in any empirical case. In contrast to quasi-simulation being used in some existing approaches, our proposed method can be used for any real data, including future data, but existing methods in the literature cannot. Our approach is for investors for their investment decision-making when they use macro-hedging as their trading strategy.

We confirm and substantially extend the recent empirical result of Andersen et al. (Andersen, T. G., O. Bondarenko, A. S. Kyle and A. A. Obizhaeva, 2015, Unpublished), where it is shown that the amount of risk $W$ exchanged in the E-mini S&P futures market (i.e., price times volume times volatility) scales like the 3/2 power of the number of trades $N$. We show that this 3/2-law holds very precisely across 12 futures contracts and 300 single US stocks, and across a wide range of time scales. However, we find that the “trading invariant” $I=W∕N^{3∕2}$ proposed by Kyle and Obizhaeva is in fact quite different for different contracts, in particular, between futures and single stocks. Our analysis suggests $I∕{𝒞}$ as a more natural candidate, where ${𝒞}$ is the average spread cost of a trade, defined as the average of the trade size times the bid–ask spread. We also establish two more complex scaling laws for the volatility $\sigma$ and the traded volume $V$ as a function of $N$, that reveal the existence of a characteristic number of trades $N_0$ above which the expected behavior $\sigma \sim \sqrt{N}$ and $V\sim N$ hold, but below which strong deviations appear, induced by the size of the tick.

We study a series of static and dynamic portfolios of Volatility Index (VIX) futures and their effectiveness to track the VIX. We derive each portfolio using optimization methods, and evaluate its tracking performance from both empirical and theoretical perspectives. Among our results, we show that static portfolios of different VIX futures fail to track VIX closely. VIX futures simply do not react quickly enough to movements in the spot VIX. In a discrete-time model, we design and implement a dynamic trading strategy that adjusts daily to optimally track VIX. The model is calibrated to historical data and a simulation study is performed to understand the properties exhibited by the strategy. In addition, compared to the volatility ETN, VXX, we find that our dynamic strategy has a superior tracking performance.

Emerging markets have delivered significant double-digit returns to foreign investors for more than a decade, clearly outpacing the returns from developed markets. The gains, however, have come with a price: high risk. In particular, political instability and erratic macroeconomic policies have caused wide swings in local currencies. Although these swings have mitigated in recent years, it behooves foreign investors to use currency derivatives to limit their impact. This article provides an overview of currency derivatives and strategies to hedge currency risk in emerging markets, including developments in currency derivatives in selected emerging economies in Asia, Africa, Europe, and Latin America.

In energy markets, changes in the spot price due to the influence of weather and seasonal demand conditions are partially predictable. In this work, we examine the German GASPOOL and NetConnect Germany natural gas markets using the Ederington and Salas [2008] framework that considers the predictive power of the base (futures price minus spot price) in the estimation of minimum variance hedge ratios. A considerable improvement in risk reduction and hedging effectiveness can be obtained by considering the partial predictability of changes in spot prices. We find that long hedges perform better than short hedges and there is no benefit to be gained by using more complex hedging estimations (BEKK) over the simpler OLS model. Seasonality is also found in hedging ratios.

Energy-based assets are showing increased susceptibility to volatility arising out of geo-political, economic, climate and technological events. Given the economic importance of energy products, their market participants need to be able to access efficient strategies to effectively manage their exposures and reduce price risk. This chapter will outline the key futures-based hedging approaches that have been developed for managing energy price risk and evaluate their effectiveness. A key element of this analysis will be the breadth of assets considered. These include Crude and Refined Oil products, Natural Gas and wholesale Electricity markets. We find significant differences in the hedging effectiveness of the different energy markets. A key finding is that, Natural Gas and particularly Electricity futures are relatively ineffective as a risk management tool when compared with other energy assets.

As the international financial marketplace has evolved to encompass a wide range of tradable asset classes, tensions between classical investment theory, trading practices, and government regulations have grown. This chapter will map the history of modern trading, taking a close look at the products, venues, and technological underpinnings of today's futures markets. It will focus on high-frequency trading, assessing the varying roles and needs of investment elites, market makers, regulators, and the public in maintaining clean and orderly market mechanisms. Key questions include the role of market participants, hedgers, speculators, and arbitrageurs in high-frequency trading and price discovery, their influence over fluctuations in financial stability, and the implications for the financial system as a whole. The chapter will conclude with a look ahead in terms of the regulatory activities that will shape these mechanisms in the years to come, with comments on market microstructure, the provision of liquidity, and innovation in futures markets around the world.

The addition of nuclear and neutrino physics to general relativistic fluid codes allows for a more realistic description of hot nuclear matter in neutron star and black hole systems. This additional microphysics requires that each processor have access to large tables of data, such as equations of state. Modern many-tasking execution models contain special semantic constructs designed to simplify distributed access to such tables and to reduce the negative impact in distributed large table access through network latency hiding measures such as local control objects. We present evolutions of a neutron star obtained using a message driven multi-threaded execution model known as ParalleX.