Showing papers in "Journal of Futures Markets in 2002"
TL;DR: In the absence of overnight trading, the best daily forecast of volatility is produced by modeling overnight volatility differently from intraday volatility as mentioned in this paper, and it is shown that the daily volatility is best measured by the sum of intra-day squared 5min returns, excluding the overnight return.
Abstract: In the 24-hr foreign exchange market, Andersen and Bollerslev measure and forecast volatility using intraday returns rather than daily returns. Trading in equity markets only occurs during part of the day, and volatility during nontrading hours may differ from the volatility during trading hours. This paper compares various measures and forecasts of volatility in equity markets. In the absence of overnight trading it is shown that the daily volatility is best measured by the sum of intraday squared 5-min returns, excluding the overnight return. In the absence of overnight trading, the best daily forecast of volatility is produced by modeling overnight volatility differently from intraday volatility. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:497–518, 2002
254 citations
TL;DR: In this article, the authors investigated the stochastic behavior of agricultural commodity prices using observations of the term structures of futures prices over time, and provided empirical evidence on the theory of storage that predicts a negative relationship between stocks of inventory and convenience yields.
Abstract: The stochastic behavior of agricultural commodity prices is investigated using observations of the term structures of futures prices over time. The continuous time dynamics of (log-) commodity prices are modeled as a sum of a deterministic seasonal component, a non-stationary state-variable, and a stationary state-variable. Futures prices are established by standard no-arbitrage arguments and the Kalman filter methodology is used to estimate the model parameters for corn futures, soybean futures, and wheat futures based on weekly data from the Chicago Board of Trade for the period 1972–1997. Furthermore, in a discussion of the estimated seasonal patterns in agricultural commodity prices, the paper provides empirical evidence on the theory of storage that predicts a negative relationship between stocks of inventory and convenience yields; in particular, convenience yields used in this analysis are extracted using the Kalman filter. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:393–426, 2002
232 citations
TL;DR: In this paper, five-minute returns from FTSE-100 index futures contracts were used to obtain accurate estimates of daily index volatility from January 1986 to December 1998, and these realized volatility measures are used to get inferences about the distributional and autocorrelation properties of FTSe-100 volatility.
Abstract: Five-minute returns from FTSE-100 index futures contracts are used to obtain accurate estimates of daily index volatility from January 1986 to December 1998. These realized volatility measures are used to obtain inferences about the distributional and autocorrelation properties of FTSE-100 volatility. The distribution of volatility measured daily is similar to lognormal while the volatility time series has persistent positive autocorrelation that displays long-memory effects. The distribution of daily returns standardized using the measures of realized volatility is shown to be close to normal, unlike the unconditional distribution. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:627–648, 2002
118 citations
TL;DR: In this article, a comparison of information efficiencies between the Singapore Exchange and the Taiwan Futures Exchange is examined for Taiwan Index Futures listed in both markets, and the results show a common stochastic trend between index futures and their underlying indices, but also provide strong evidence to suggest price discovery primarily originates from the Singapore futures market.
Abstract: This paper focuses on the increasing competition between exchanges for listing similar index futures contracts and the impact this has on information dissemination between various markets. Specifically, using both the Hasbrouck and Gonzalo–Granger methodologies for extracting the information content held in each market, a comparison of information efficiencies between the Singapore Exchange and the Taiwan Futures Exchange is examined for Taiwan Index Futures listed in both markets. The results show not only a common stochastic trend between index futures and their underlying indices, but also provide strong evidence to suggest price discovery primarily originates from the Singapore futures market. There are direct implications of this result for both financial exchanges and traders—in particular, that traders realize price determination can arise from both futures markets, and the need for exchanges to maintain a reputation as an information center for these similarly traded financial instruments. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 219–240, 2002
97 citations
TL;DR: In this article, the relationship between electricity futures prices and natural gas futures prices was analyzed and the mean reversion was found in both in-sample and out-of-sample tests.
Abstract: This article analyzes the relationship between electricity futures prices and natural-gas futures prices. We find that the daily settlement prices of New York Mercantile Exchange's (NYMEX's) California–Oregon Border (COB) and Palo Verde (PV) electricity futures contracts are cointegrated with the prices of its natural-gas futures contract. The coefficient of natural-gas futures prices in our model of COB electricity futures prices is not significantly different from the coefficient of gas prices in our model of PV electricity although there are differences in the production of electricity in these two service areas. The coefficients in our model do reflect differences in the consumption of electricity in the COB and PV service areas, however. Our trading-rule simulations indicate that the statistically significant mean reversion found in the relationship between electricity and natural-gas futures prices also is economically significant in both in-sample and out-of-sample tests. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:95–122, 2002
94 citations
TL;DR: This article investigated the relationship between derivatives use and the extent of asymmetric information faced by the firm and found that both the use of derivatives and extent of derivatives usage is associated with lower information.
Abstract: We investigate the relationship between derivatives use and the extent of asymmetric information faced by the firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of derivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, for firms using derivatives (notably currency derivatives) we find that analysts' earnings forecasts have significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo and Duffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise related to exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 241–267, 2002
85 citations
TL;DR: The authors investigated the relation between petroleum futures spread variability, trading volume, and open interest in an attempt to uncover the source(s) of variability in futures spreads and found that contemporaneous (lagged) volume and open-interest provide significant explanation for futures spreads volatility when entered separately.
Abstract: This study investigates the relation between petroleum futures spread variability, trading volume, and open interest in an attempt to uncover the source(s) of variability in futures spreads The study finds that contemporaneous (lagged) volume and open interest provide significant explanation for futures spreads volatility when entered separately The study also shows that lagged volume and lagged open interest, when entered in the conditional variance equation simultaneously, have greater effect on volatility and substantially reduce the persistence of volatility This finding seems to support the sequential information arrival hypothesis of Copeland (1976) Finally, the findings of this study also suggest a degree of market inefficiency in petroleum futures spreads © 2002 Wiley Periodicals, Inc Jrl Fut Mark 22:1083–1102, 2002
62 citations
TL;DR: In this article, the authors employed nonlinearly mean-reverting models to characterize the basis of the S&P 500 and the FTSE 100 indices over the post-1987 crash period, capturing empirically these theoretical predictions and examining the view that the degree of mean reversion in the basis is a function of the size of the deviation from equilibrium.
Abstract: Several stylized theoretical models of futures basis behavior under nonzero transactions costs predict nonlinear mean reversion of the futures basis towards its equilibrium value. Nonlinearly mean-reverting models are employed to characterize the basis of the S&P 500 and the FTSE 100 indices over the post-1987 crash period, capturing empirically these theoretical predictions and examining the view that the degree of mean reversion in the basis is a function of the size of the deviation from equilibrium. The estimated half lives of basis shocks, obtained using Monte Carlo integration methods, suggest that for smaller shocks to the basis level the basis displays substantial persistence, while for larger shocks the basis exhibits highly nonlinear mean reversion towards its equilibrium value. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:285–314, 2002
61 citations
TL;DR: This article investigated 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 and found that expected net positions of traders generally do not co-vary with volatility.
Abstract: 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
58 citations
TL;DR: In this paper, the authors compare the averages proposed in both the options and econometrics literatures and the averages used by major commercial vendors for the S&P 500 futures options market.
Abstract: Options researchers have argued that by averaging together implied standard deviations, or ISDs, calculated from several options with the same expiry but different strikes, the noise in individual ISDs can be reduced, yielding a better measure of the market's volatility expectation. Various options researchers have suggested different weighting schemes for calculating these averages. In the forecasting literature, econometricians have made the same argument but suggested quite different weighting schemes. Ignoring both literatures, commercial vendors calculate ISD averages using their own weightings. We compare the averages proposed in both the options and econometrics literatures and the averages used by major commercial vendors for the S&P 500 futures options market. Although some averages forecast better than others, we find that the question of the best weighting scheme is of secondary importance. More important is the fact that the ISDs are upward biased measures of expected volatility. Fortunately, this bias is stable over time, so past bias patterns can be used to obtain unbiased volatility forecasts. Once this is done, most ISD averages forecast better than time series and naive models, and the differences between the averages produced by the various proposed weighting schemes are small. © 2002 Wiley Publications, Inc. Jrl Fut Mark 22:811–837, 2002
55 citations
TL;DR: This article used a simple trading strategy to approximate the impact of convenience yields of commodity futures contracts using three variables: underlying asset price volatility, futures contract price volatility and the futures contract time to maturity.
Abstract: The pricing of commodity futures contracts is important both for professionals and academics It is often argued that futures prices include a convenience yield, and this article uses a simple trading strategy to approximate the impact of convenience yields The approximation requires only three variables—underlying asset price volatility, futures contract price volatility, and the futures contract time to maturity The approximation is tested using spot and futures prices from the London Metals Exchange contracts for copper, lead, and zinc with quarterly observations drawn from a 25-year period from 1975 to 2000 Matching Euro-Market interest rates are used to estimate the risk-free rate The convenience yield approximation is both statistically and economically important in explaining variation between the futures price and the spot price after adjustment for interest rates © 2002 Wiley Periodicals, Inc Jrl Fut Mark 22:1005–1017, 2002
TL;DR: In this paper, foreign exchange hedging ratios are simultaneously estimated alongside freight and commodity ratios in a time-varying portfolio framework to support the decision by the London International Financial Futures Exchange to cease trading the Baltic International Freight Futures exchange freight futures contract because of its low levels of trading activity.
Abstract: Foreign exchange hedging ratios are simultaneously estimated alongside freight and commodity ratios in a time-varying portfolio framework. Foreign exchange futures are by far the most important derivative instrument used to reduce uncertainty for traders. Our results lend support to the decision by the London International Financial Futures Exchange to cease trading the Baltic International Freight Futures Exchange freight futures contract because of its low levels of trading activity that likely resulted from its apparent unattractiveness as a hedging instrument. @ 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1205–1221, 2002
TL;DR: This paper conducted an empirical analysis of the mispricing of calendar spreads for stock index futures and found that traders seeking to roll-over their positions from near to deferred futures contracts close to maturity increase the magnitude of spread misprices.
Abstract: This paper conducts an empirical analysis of the mispricing of calendar spreads for stock index futures. Using recent data drawn from the Sydney Futures Exchange, a sharp increase in the magnitude of spread mispricing immediately prior to maturity of the near contract is documented. This pattern in mispricing is related to a sharp decline in open interest in the near contract and an increase in open interest in the deferred contract. Further, the direction of mispricing of the near and deferred contracts are more likely to move in opposite directions as the near contract approaches maturity. These findings are consistent with the hypothesis that traders seeking to roll-over their positions from near to deferred futures contracts close to maturity increase the magnitude of spread mispricing. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:451–469, 2002
TL;DR: In this paper, the authors examined the impact of the introduction of the Nasdaq-100 Index Tracking Stock (referred to as Cubes) on the pricing relationship between Nasdaq100 futures and the underlying index.
Abstract: This paper examines the impact of the introduction of the Nasdaq-100 Index Tracking Stock (referred to as Cubes) on the pricing relationship between Nasdaq-100 futures and the underlying index. Observations obtained from tick-by-tick Nasdaq-100 futures transactions and index value data support the hypothesis that the introduction of Cubes in March 1999 has led to improvements in the Nasdaq-100 index futures pricing efficiency. Both the size and frequency of violations in futures price boundaries appear to be reduced. Furthermore, there appears to be an increase in the speed of the market response to observed violations. These results are attributed to the increased ease in establishing a spot Nasdaq100 index position after the introduction of the tracking stock. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 197–218, 2002
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TL;DR: The authors explored the relationship of changes in the S&P 500 index implied volatility surface to economic state variables, with the majority of explanatory power coming from index returns, with factors other than index returns adding negligible explanatory ability.
Abstract: This article explores the relationship of changes in the S&P 500 index implied volatility surface to economic state variables. Observable variables can explain some of the variation in implied volatility, with the majority of explanatory power from index returns. Although the contemporaneous return is most important for explaining changes in short dated volatility, the path of the index is important for explaining changes in long dated volatility. Other variables also display statistically significant relations to volatility changes. Shocks to the Nikkei 225, short-term interest rates, and the corporate/government bond yield spread are correlated with small, systematic changes in implied volatility. The results suggest a multifactor model for market volatility, with factors other than index returns adding negligible explanatory ability. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:915–937, 2002
TL;DR: The authors compared the performance of the generalized binomial tree (GBT) and Derman and Kani's implied volatility tree (IVT) with the Black-Scholes model.
Abstract: Previously, few, if any, comparative tests of performance of Jackwerth's (1997) generalized binomial tree (GBT) and Derman and Kani (1994) implied volatility tree (IVT) models were done. In this paper, we propose five different weight functions in GBT and test them empirically compared to both the Black-Scholes model and IVT.
We use the daily settlement prices of FTSE-100 index options from January to November 1999. With both American and European options traded on the FTSE-100 index, we construct both GBT and IVT from European options and examine their performance in both the hedging of European option and the pricing of its American counterpart. IVT is found to produce least hedging errors and best results for American call options with earlier maturity than the maturity span of the implied trees. GBT appears to produce better results for American ATM put pricing for any maturity, and better in-sample fit for options with maturity equal to the maturity span of the implied trees. Deltas calculated from IVT are consistently lower (higher) than Black-Scholes deltas for both European and American calls (puts) in absolute term. The reverse holds true for GBT deltas. These empirical findings about the relative performance of GBT, IVT, and Standard Black-Scholes models are important to practitioners as they indicate that different methods should be used for different applications, and some cautions should be exercised. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:601–626, 2002
TL;DR: In this article, a family of term structure models that can be applied to value contingent claims in multicommodity and seasonal markets is presented and applied to the futures contracts on crude and heating oils trading on NYMEX.
Abstract: This article presents a family of term structure models that can be applied to value contingent claims in multicommodity and seasonal markets. We apply the framework to the futures contracts on crude and heating oils trading on NYMEX. We show how to deal with the problem of having to value products depending on the “whole” market, such as spread options on contracts on a single commodity maturing at different times (time-spreads) or spread options on the added value of the products derived from the raw commodity (crack spreads). Also, we show how to build term structure models for a commodity that experiences seasonality, such as heating oil. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1019–1035, 2002
TL;DR: The authors investigated characteristics of cross-market correlations using daily data from U.S. stock, bond, money, and currency futures markets using a new multivariate GARCH model that permits direct hypothesis testing on conditional correlations.
Abstract: We investigate characteristics of cross-market correlations using daily data from U.S. stock, bond, money, and currency futures markets using a new multivariate GARCH model that permits direct hypothesis testing on conditional correlations. We find evidence that arrival of information in a market affects subsequent cross-market conditional correlations in the sample period following the stock market crash of 1987, but there is little evidence of such a relationship in the precrash period. In the postcrash period, we also find evidence that the prime rate of interest affects daily correlations between futures returns. Furthermore, we find that conditional correlations between currency futures and other markets decline steeply a few months before the crash and revert to normal dynamics after the crash. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1059–1082, 2002
TL;DR: In this article, a new methodology for estimating implied probability density functions for futures prices from American options is developed, where the restricting Black-Scholes assumption of a lognormal distribution for the underlying asset is relaxed with the use of the more flexible distributional form of an Edgeworth series expansion.
Abstract: This article develops a new methodology for estimating implied probability density functions for futures prices from American options. The restricting Black–Scholes assumption of a lognormal distribution for the underlying asset is relaxed with the use of the more flexible distributional form of an Edgeworth series expansion around a lognormal distribution. The model is applied to the crude oil market. The results provide strong evidence that the market consensus can be accurately reflected in the risk-neutral densities recovered from observed option prices. The recovered distributions are tested and found to differ significantly from a single lognormal distribution. In addition, the recovered distributions are more robust than those recovered with a model, which assumes a mixture of two lognormal distributions. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:1–30, 2002
TL;DR: In this paper, the impact of SPDR trading on the efficiency of the S&P 500 index market was examined and it was shown that SPDRs facilitate short arbitrage by simplifying the process of shorting the cash index against futures.
Abstract: Standard & Poor's Depositary Receipts (SPDRs) are exchange traded securities representing a portfolio of S&P 500 stocks. They allow investors to track the spot portfolio and better engage in index arbitrage. We tested the impact of the introduction of SPDRs on the efficiency of the S&P 500 index market. Ex-post pricing efficiency and ex-ante arbitrage profit between SPDRs and futures were also examined. We found an improved efficiency in the S&P 500 index market after the start of SPDRs trading. Specifically, the frequency and length of lower boundary violations have declined since SPDRs began trading. This result is consistent with the hypothesis that SPDRs facilitate short arbitrage by simplifying the process of shorting the cash index against futures. Tests of pricing efficiency comparing SPDRs and futures suggested that index arbitrage using SPDRs as a substitute for program trading in general results in losses. Although short arbitrages earn a small profit on average, gains are statistically insignificant. A trade-by-trade investigation showed that prices are instantaneously corrected after the presence of mispricing signals, introducing substantial risk in arbitraging. Evidence in general supported pricing efficiency between SPDRs and the S&P 500 index futures—both ex-post and ex-ante. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:877–900, 2002
TL;DR: The authors analyzes the hedging decisions for firms facing price and basis risk and highlights the role of options as useful hedging tools from the shape of the first-best solution, and then it is used to examine the optimal hedging strategy in futures and options markets.
Abstract: This paper analyzes the hedging decisions for firms facing price and basis risk. Two conditions assumed in most models on optimal hedging are relaxed. Hence, (i) the spot price is not necessarily linear in both the settlement price and the basis risk and (ii) futures contracts and options on futures at different strike prices are available. The design of the first-best hedging instrument is first derived and then it is used to examine the optimal hedging strategy in futures and options markets. The role of options as useful hedging tools is highlighted from the shape of the first-best solution. © 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22:59–72, 2002
TL;DR: In this paper, the cost-of-carry model is applied to the hedging problem and the optimal static and dynamic hedges are derived for both direct hedging and cross-hedging situations.
Abstract: The hedging problem is examined where futures prices obey the cost-of-carry model. The resultant hedging model explicitly incorporates maturity effects in the futures basis. Formulas for the optimal static and dynamic hedges are derived. Although these formulas are developed for the case of direct hedging, the framework used is sufficiently flexible so that these formulas can be applied to many cross-hedging situations. The performance of the model is compared with that of several other models for two hedging scenarios: one involving a financial asset and the other involving a commodity. In both cases, significant maturity effects were found in the first and second moments of the futures basis. Our hedging formulas outperformed other hedging strategies on an ex-ante basis. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1179–1203, 2002
TL;DR: This article employed intraday data for futures and cash values for the S&P 500 over the 1993-1996 period to characterize the lead-lag relationship between these two markets and their basis behavior.
Abstract: Employing intraday data for futures and cash values for the S&P 500 over the 1993–1996 period, we attempt to characterize the lead–lag relationship between these two markets and their basis behavior. Our findings show evidence of pronounced futures leadership when markets are rising, with no feedback from the cash market. However, when markets are falling, futures leadership is less evident and significant feedback from the cash market is noted. We also provide evidence of a positive relationship between the basis and return volatility. We offer an explanation, based on trader selectivity, for the leadership-asymmetry and the basis–volatility relationship. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:649–677, 2002
TL;DR: It is shown how to use standard methods, such as Cox, Ross, and Rubinstein (CRR), trinomial trees, or finite differences, to produce uniformly converging numerical results suitable for straightforward extrapolation.
Abstract: For derivative securities that must be valued by numerical techniques, the trade-off between accuracy and computation time can be a severe limitation. For standard lattice methods, improvements are achievable by modifying the underlying structure of these lattices; however, convergence usually remains non-monotonic. In an alternative approach of general application, it is shown how to use standard methods, such as Cox, Ross, and Rubinstein (CRR), trinomial trees, or finite differences, to produce uniformly converging numerical results suitable for straightforward extrapolation. The concept of Λ, a normalized distance between the strike price and the node above, is introduced, which has wide ranging significance. Accuracy is improved enormously with computation times reduced, often by orders of magnitude. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:315–338, 2002
TL;DR: This paper found that the implied volatilities of corn, soybean, and wheat futures options 4 weeks before option expiration have significant predictive power for the underlying futures contract return VOLATilities through option expiration from January 1988 through September 1999.
Abstract: This article finds that the implied volatilities of corn, soybean, and wheat futures options 4 weeks before option expiration have significant predictive power for the underlying futures contract return volatilities through option expiration from January 1988 through September 1999. These implied volatilities also encompass the information in out-of-sample seasonal Glosten, Jagannathan, and Runkle (GJR;1993) volatility forecasts. Evidence also demonstrates that when corn-implied volatility rises relative to out-of-sample seasonal GJR volatility forecasts, implied volatility substantially overpredicts realized volatility. However, simulations of trading rules that involve selling corn option straddles when corn-implied volatility is high relative to out-of-sample GJR volatility forecasts indicate that none of the trading rules would have been significantly profitable. This finding suggests that these options are not necessarily overpriced. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:959–981, 2002
TL;DR: In this article, the value of a compound option has been derived by using Fourier integrals and the expectation of a truncated bivariate normal variable, which is based on the martingale approach, which provides a simple and powerful tool for valuing contingent claims.
Abstract: The value of a compound option, an option on an option, has been derived by Geske (1976) using Fourier integrals. This article presents two alternative proofs to derive the value of a compound option. One proof is based on the martingale approach, which provides a simple and powerful tool for valuing contingent claims. The second proof uses the expectation of a truncated bivariate normal variable. These proofs allow for an intuitive interpretation of the three elements constituting the value of a compound option. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:1103–1115, 2002
TL;DR: In this paper, the authors used a regression model to determine the degree to which delivery options influence basis variability on the first day of the maturity month of the corn futures contract, and then used the estimated implicit options values to improve the forecasts of basis convergence over the 2-month period prior to maturity.
Abstract: The corn futures contract, traded on the Chicago Board of Trade, provides sellers with delivery options about the timing of delivery, the location of delivery, and the grade to be delivered. These options presumably have values that can vary from one delivery month to the next. The joint values of the timing and location options are estimated for each delivery month for the years 1989 through 1997. These estimates are then used in regression models to determine the degree to which they influence basis variability on the first day of the maturity month. Econometric models are also developed to see if the estimated implicit options values are useful in improving the forecasts of basis convergence over the 2-month period prior to maturity. The results suggested that variation in the delivery options values in the corn futures contract does indeed help explain basis variability on the first day of maturity. An option-value variable, based on estimated values two months prior to maturity, resulted in occasional, small improvements (from a statistical point of view) in the precision of forecasts. The existence of delivery options increases basis variability at maturity, but it is difficult to use this information to improve forecasts of basis convergence. One limitation of the analysis is that the Chicago cash market had few transactions per day during the sample period, and hence the reported spot prices may be inadequate for making high-quality estimates of the options values. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:783–809, 2002
TL;DR: In this paper, the effects of skewness and kurtosis on the Sortino ratio and UPR were evaluated within the Edgeworth-Sargan density family, and it was shown that the Sharpe ratio may frequently lead to a smaller futures position than the other two ratios.
Abstract: Assuming portfolio returns are normally distributed, it is shown that both Sortino ratio (SR) and upside potential ratio (UPR) are monotonically increasing functions of the Sharpe ratio. As a result, all three risk-adjusted performance measures provide identical ranking among investment alternatives. The effects of skewness and kurtosis are then evaluated within the Edgeworth-Sargan density family. For the Sortino ratio, the above conclusion remains valid in the presence of negative skewness or excessive kurtosis. Similar results apply to the UPR with modifications. For all other cases, both SR and UPR provide exactly opposite ranking among investment alternatives to that suggested by the Sharpe ratio when the Sharpe ratio is large. Applications to futures hedging are discussed. Specifically, it is found that the Sharpe ratio may frequently lead to a smaller futures position than the other two ratios. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:483–495, 2002
TL;DR: The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986.
Abstract: The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04 to 5.90% for calls, and from 7.97 to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of negative early exercise premiums. However, a trading simulation shows that traders must be able to trade within the bid–ask spread to profit from these apparent arbitrage opportunities. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:287–313, 2003
TL;DR: This paper examined the relationship between corn and soybean futures volumes for contracts traded in the United States and Japan and found that these contracts, rather than acting as substitutes, exhibit a complementary relationship.
Abstract: This article examines the relationship between corn and soybean futures volumes for contracts traded in the United States and Japan. Because the contract specifications for corn and soybeans futures traded on the Chicago Board of Trade (CBOT), the Tokyo Grain Exchange (TGE), and the Kanmon Commodity Exchange (KCE) are highly similar, the existence of interactions might be expected. Previous research has identified price relationships between these similar contracts. With the advent of agricultural trading on the CBOT's Project A overnight electronic trading system, an overlap of trading times of the U.S. and Japanese exchanges for these commodity contracts resulted. An analysis of TGE and KCE corn and soybean futures volumes indicates that these contracts, rather than acting as substitutes, exhibit a complementary relationship. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:355–370, 2002