Download or read book The Effect of Futures Markets on Spot Market Volatility written by Alan Picard and published by . This book was released on 2009 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Futures markets have been blamed for higher volatility in the underlying asset market. A popular belief is that trading activity in futures markets encourage speculation, which destabilizes the spot market. The alleged destabilization takes the form of higher spot market volatility. On the other hand, a favorable view is that futures trading helps stabilizing the underlying market and leads to more complete markets and enhanced information flows. The numerous papers that have studied the effect of the introduction of derivatives on the underlying assets have obtained different results. This paper analyses the effect of the introduction of futures markets on the underlying market for Canadian bankers' acceptances. More specifically this study investigates the contention that the introduction of the futures (BAX) on the Montreal exchange on April 24 th 1988 has affected the volatility of the underlying asset. To study this effect, several models and approaches are used such as the GARCH process and others models and approaches formulated by several academics who studied this issue for other underlying spot markets.

Download or read book Effect of Futures Trading on Spot Market Volatility written by Brajesh Kumar and published by . This book was released on 2011 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the relationship between futures trading activity and spot market volatility for agricultural, metal, precious metals and energy commodities in Indian commodity derivatives market. This article contributes to the debate whether the futures trading in Indian commodity futures market stabilizes or destabilizes spot market. We explore this issue by modeling contemporaneous as well as dynamic relationship between spot volatility and futures trading activity including trading volume (speculative/day trading) and open interest (hedging). Following Bessembinder and Senguin (1992), we examine contemporaneous relationship through augmented GARCH model in which spot volatility is modeled as GARCH (1,1) process and trading activity is used as explanatory variable. We also decompose futures trading volume and open interest series into expected and unexpected component. The lead-lag relationship between spot price volatility and futures trading volume and open interest is investigated through VAR model. Granger causality tests, forecast error variance decompositions and impulse response function are used to understand the dynamic relationship between these variables. We found that both expected and unexpected futures trading volume affects contemporaneous spot volatility positively. However, in case of agricultural commodities only unexpected volume affects the contemporaneous spot volatility. Granger causality tests, forecast error variance decompositions and impulse response function confirm that the lagged unexpected volatility causes spot price volatility for all commodities. The effect of speculative/day trading activity measured by trading volume on spot market volatility is positive. However, hedging activity measured by open interest does not show significant effect on spot market volatility. We do not find any effect of spot volatility on futures trading activity for most of the commodities.

Download or read book The Effect of Futures Trading on Cash Market Volatility written by Gary Robinson and published by . This book was released on 1993 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Futures Trading and the Level and Volatility of Spot Prices written by Ronald Britto and published by . This book was released on 1985 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Price Effects of Financial Futures Trading written by David Cohen and published by . This book was released on 1982 with total page 135 pages. Available in PDF, EPUB and Kindle. Book excerpt: There has been much concern voiced over the possible spot market volatility effects of the new financial futures markets, particularly in a study by the Federal Reserve Board and the Treasury Department regarding Treasury instrument futures markets. This study is designed to provide evidence on the spot price volatility effects of futures trading in 90-day Treasury Bills, The method of analysis is to first identify periods of time that are roughly similar in their overall capital market volatility, but differ in that one period is before TBill futures trading began and its comparable period is after TBill futures trading began. Next several econometric techniques are used to estimate models of interest rate determination. The estimation produces measures of spot TBill rate volatility for each of the comparable periods which are then used in a pairwise fashion to ascertain the spot price volatility effects of futures trading. The interest rate models come from the rather large body of macroeconomics literature dealing with the formation of interest rates. The econometric techniques span different assumptions imposed on the models and each technique provides consistent estimates of the model parameters under the stated conditions. Further, simple analysis of daily and weekly TBill rates is performed to provide continuity with studies of futures market spot price effects in other commodities. The results of all the statistical tests suggest that Treasury Bill futures trading does not increase spot market volatility during relatively stable periods of capital market activity, but is associated with increased spot Treasury Bill market volatility during times when overall capital market conditions are volatile. These results indicate that Treasury Bill futures trading alone does not increase spot market volatility, contrary to the hypothesis that simply the existence of financial futures trading destabilizes the underlying spot market.

Download or read book The Effect of Contemporaneous Futures Market Volume on Spot Market Volatility written by John L. G. Board and published by . This book was released on 1997 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Impacts of Derivative Markets on Spot Market Volatility and Their Persistence written by Chulwoo Han and published by . This book was released on 2014 with total page 11 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this article, I investigate the impacts of futures and options markets on the volatility of the underlying market with a focus on their persistence over time. Empirical study yields several interesting results that often contrast with previous findings. it suggests that the impacts on the spot market volatility depends on the quality of new information generated by derivatives trading. Futures market reduces spot market volatility by providing new, material information, but options market generates noisy information which results in increase in volatility and decrease in its sensitivity to price change. While the impact by futures persists, that of options mostly disappears as the market matures. This is perhaps because futures market is mainly driven by informed, experienced participants, while options market attracts new, inexperienced investors. It would be worth revisiting other markets with the methods in this study and testing validity of the conclusions made in previous studies.

Download or read book The Impact of the Introduction of Future Contracts on Spot Contracts Volatility for the Oil Market written by Joseph Maarawi and published by . This book was released on 2015 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Stock Index Futures Trading and Spot Market Volatility written by George Karathanassis and published by . This book was released on 2006 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates possible spill-over effects on the Spot Market due to the initiation of Futures contracts. According to many analysts there still exists a puzzle regarding the stabilization or destabilization effects of futures contracts. Although the speculative forces (uninformed investors) tend to destabilize the market, rational hedging strategies and the transition of risk allow for stabilization shift. In order to investigate this issue, many researchers during the last decade, have utilized the GARCH framework enriched to capture many stylized financial features, such as the asymmetric response to news and leptokurtosis. However, in this paper the GARCH framework is extended to allow for skewness in the return's distribution and to examine the timing of possible structural changes, while the conditional mean of the process is adjusted to account for time-varying risk premia and for the day of the week effects decomposition. Furthermore, the distinguishing feature of this paper is the SWARCH econometric model, which enables a dynamic regime shifting through a Markov Chain transition matrix. According to the empirical findings on the FTSE-20/ASE futures contract, there exists a significant stabilization effect on the long run, while in the short run this seems to be non-robust.

Download or read book Index Futures Trading and Spot Market Volatility Evidence from an Emerging Market written by Kiran and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Studies on the impact of futures introduction on the volatility of the underlying index report no increase in the spot volatility after the futures introduction. However, the prior studies do not comment on how exactly the information transmits from the futures market to the spot market. This paper focuses on investigating whether the change in the structure of spot volatility evolution process is due to the futures trading activity. The relation between the Futures trading activity (measured through trading volume and open interest) and spot index volatility is documented, following Bessembinder and Seguin (1992), by partitioning trading activity into expected and shock components by an appropriate ARMA model. The series are then appended in the variance equation through an appropriate ARMA-GARCH model, following Gulen and Mayhew (2000). Further, the study examines the effect of the Sept. 11th terrorist attack has had on the Nifty spot-futures relation.The study concludes that post the Sept. 11th attack, the relation between Futures Trading Activity and Spot volatility has strengthened, implying that the market has become more efficient in assimilating the information into its prices. This is evident in both volume and open interest (expected and activity shock) being significant post Sept. 11 while not being significant pre Sept. 11.

Download or read book The Effect of Futures Markets on the Stability of Commodity Prices written by Johan de Jong and published by . This book was released on 2019 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Do futures markets have a stabilizing or destabilizing effect on commodity prices? Empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The spot market exhibits negative feedback between forecasts and prices, while the futures market is of the positive feedback type, which makes it susceptible to bubbles and crashes. We show that the effect of a futures market on spot price stability changes non-monotonically with the strength of the coupling between the spot and futures markets. This coupling depends positively on the number of speculators on the futures market and negatively on storage costs, speculator risk aversion, and the volatility of futures prices. In the end we observe a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.

Download or read book Understanding Volatility the Case of the Introduction of Futures Trading in the National Stock Exchange India written by Saurabh Kumar and published by . This book was released on 2002 with total page 13 pages. Available in PDF, EPUB and Kindle. Book excerpt: This project attempts to investigate the effect of the introduction of Futures trading in the National Stock Exchange, India (NSE) and get insights into the effect upon the volatility of the NSE. The underlying spot market volatility is estimated using symmetric GARCH methods. Any increase in stock market volatility that has followed the onset of futures trading has generally been taken as justifying the traditional view that the introduction of futures markets induces destabilizing speculation. This has led to calls for greater regulation to minimise any detrimental effects. An alternative view is that futures markets provide an additional route by which information can be transmitted, and, therefore, increased spot market volatility may simply be a consequence of the more frequent arrival, and more rapid processing of information. Thus, futures trading may be fully consistent with efficiently functioning markets.This paper attempts to investigate the change, if any, in the volatility observed in the Indian stock market due to the introduction of futures trading. The change in the volatility is compared not only in absolute levels of volatility but also in terms of the structure of the volatility. This is done to give insights into the way the futures market is influencing the Indian spot market's volatility.

Download or read book Trading Mechanisms Speculative Behavior of Investors and the Volatility of Prices written by Hun Y. Park and published by . This book was released on 1989 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper compares the volatility of spot prices (dealership market) with that of futures prices (auction market) to test the implications of different trading mechanisms for the volatility of prices. First, a natural estimator of the volatility is sued. Using the intraday data of the major Market Index and its futures prices, we show that the volatility of opening prices is higher than that of closing prices not only in the spot market but in the futures market, and that the intraday volatility patterns are U-shaped in both markets. Of particular interest is that futures prices do not appear to be as volatile as spot prices when the natural estimator of volatility is used, to the contrary of the conventional wisdom. We argue that the different volatility patterns during the day are not necessarily due to the different trading mechanisms, auction market versus dealership market. Instead, after developing a simple theoretical model of speculative prices, we show that at least part of the different volatility patterns during the day may be attributable to speculative behavior of investors based on heterogeneous information. In addition, we further investigate the volatilities of spot and futures prices using a temporal estimator of price volatility as an alternative to the natural estimator. Based on the temporal estimator, we cannot find any systematic pattern of volatilities during the day in both spot and futures markets, and that futures prices appear to be more volatile than spot prices in terms of how quickly the price moves beyond a given unit price level, but not in terms of how much the price changes during a given unit time interval. Some policy implications are also discussed.

Download or read book The Influence of Futures on Spot Price Volatility in a Model for a Storable Commodity written by Costanza Torricelli and published by . This book was released on 1991 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Relationship Between Futures Market Speculation and Spot Market Volatility written by Xuemei Xiao and published by . This book was released on 2018 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: This thesis investigates the relationship between speculation in futures markets and expected and unexpected volatility in the spot markets for 21 different commodities. I use the index of adequate speculation, INDADSP, and the index of excess speculation, INDEXSP, developed and estimated by Shanker (2017), to capture the degree of speculation required to meet hedging demand, and the degree of speculation in excess of hedging demand, respectively. For comparison, I also use Working's (1960) speculative index T, as a measure of speculation. I estimate the expected volatility (EV) and unexpected volatility (UEV) of the spot market using a GARCH model. The empirical results indicate that the GJR-GARCH model with a Student's t distribution for the error term is the most appropriate model, among the GARCH-family of models, to capture the volatility of 17 of the 21 spot commodity returns. However, the results of feeder cattle indicate the exists of serial correlation of the residuals for all three GARCH model I used, so I drop it and do the further analysis for the rest of 20 commodities and financial contracts. For each commodity, I create time series of matched weekly indices of speculation, expected volatility and unexpected volatility. Next, I investigate the long-run and short-run relationships between volatilities and speculation using an autoregressive distributed lag model. The results indicate that there is a long term relationship between expected and unexpected volatility and the speculative indices, for all commodities, except the Euro, Eurodollar, and U.S. T-bond, and a short term relationship between volatilities and speculation for all commodities. Finally, I apply the Toda-Yamamoto test to investigate the causal relationship between speculation in futures markets and volatility in spot markets. I find that speculation tends to lead expected volatility more than unexpected volatility for the majority of commodities/financial assets. Expected volatility, rather than unexpected volatility, tends to lead speculation for a majority of commodities/financial assets. There is a bidirectional causality between expected volatility and INDADSP, INDEXSP, and T and between unexpected volatility and INDEXSP for several different commodities and financial assets. However, there is no bidirectional causality between unexpected volatility and the speculative indices INDADSP and T for all 20 commodities/financial assets.

Download or read book Do Index Futures Cause Spot Market Volatility An Investigation of the Australian Resources Index written by Neha Deo and published by . This book was released on 2017 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper applies GARCH models to ascertain the impact of index futures trading on the volatility of the spot market. Specifically, the research aims to determine whether the introduction of index futures trading increases or decreases the level of volatility within the underlying spot market. In addition, the research verifies the sensitivity of price to information as well as the impact the leverage effect may have on the degree and structure of volatility. As Australia is a commodity driven economy, resources constitute one of the largest economic sectors. Following from this, the daily closing price of the ASX 200 Resources Index for the period 2010 to 2016 was therefore used in the analysis. Given that 14 October 2013 was when the Australian Securities Exchange launched the ASX 200 Resources Index futures, investigating the volatility prior to and after this date is also a focus of the paper. The results of the study suggest that the introduction of index futures did not substantially increase the level of volatility in the spot market but found that there is an increase in sensitivity to historical information; and that a negative leverage effect exists within the Resources Index. Since the Australian share market operates within a dynamic financial landscape, the study adopts a framework that seeks to provide behavioural and macroeconomic explanations for the findings, where appropriate.

Download or read book The Review of Futures Markets written by and published by . This book was released on 1994 with total page 1274 pages. Available in PDF, EPUB and Kindle. Book excerpt: