Showing papers on "Futures contract published in 2004"

Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets

Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing "cash flow" and "discount rate" effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.

The Futures of European Capitalism

Abstract: opment, which includes social capital as one of its explanatory factors. In the absence of this analysis, we do not know if social capital is really driving political development or some other factor, such as economic development. Overall, this is a bold and ambitious book which examines participation across the world with a big theoretical canvas and a broad range of data. However, a more judicious analysis of the data and a greater recognition of the limitations of the sources would have made it a better book.

Liquidity Risk and Arbitrage Pricing Theory

Abstract: Classical theories of financial markets assume an infinitely liquid market and that all traders act as price takers. This theory is a good approximation for highly liquid stocks, although even there it does not apply well for large traders or for modelling transaction costs. We extend the classical approach by formulating a new model that takes into account illiquidities. Our approach hypothesizes a stochastic supply curve for a security’s price as a function of trade size. This leads to a new definition of a self-financing trading strategy, additional restrictions on hedging strategies, and some interesting mathematical issues.

Dynamic Relationships among GCC Stock Markets and Nymex Oil Futures

Abstract: 1. INTRODUCTION The Gulf Cooperation Council (GCC) is a customs union that consists of six members, including four major oil-exporting countries, which are important decision makers in the Organization of Petroleum Exporting Countries (OPEC). (1) The six members are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (UAE). The non-OPEC members among them are Bahrain and Oman. In January 2003, these countries collectively accounted for about 16% of the world's 76.5 million barrels a day of total production. They possess 47% of the world's 1018.8 billion barrels of oil proven reserves. (2) For these countries, oil exports largely determine foreign earnings and governments' budget revenues and expenditures; thus they are the primary determinant of aggregate demand. (3) The aggregate demand effect influences corporate output and domestic price levels, which eventually impacts corporate earnings and stock market share prices. This demand effect can also indirectly impact share prices through its influence on expected inflation, which in turn affects the expected discount rate. Such a strong oil influence on the national economy makes these countries primary targets for investigating the links between oil prices and the performance of their stock markets. There has been a large volume of work examining the relationships among international financial markets; a good deal of work has also been devoted to the links between spot and futures petroleum prices. In contrast, little work has been done on the relationships between oil spot/futures prices and stock markets. Virtually all of this work has concentrated on a few industrial countries, namely, Canada, Germany, Japan, the United Kingdom, and the United States. No work has been done on the relationship between the stock markets of the GCC countries as an economic group and their links to the oil markets, despite the fact that the economies of these countries depend to a large extent on oil revenues and are thus susceptible to developments in the global oil market. Moreover, because each GCC country depends on oil to a different degree, comparisons between them form an interesting subject for more investigation and analysis. Additionally, the Saudi stock market, which is 9th among emerging stock markets in terms of market capitalization in 2003, is the true leader of the GCC and is thus worthy of study on its own. Furthermore, these markets can provide an additional venue for international stock diversification and portfolio formation. For example, the total GCC market return increased by more than 9% in 2002; returns ranged from 32% for Qatar to less than 1% for Saudi Arabia. In contrast, the Standard & Poor's 500 (S & P 500) FTSE, and DAX declined by about 23%, 21% and 44%, respectively, in that down year (see Figure 1). Surprisingly, the overall literature on the links between oil markets and financial markets is very limited. Jones and Kaul (1996) investigated the reaction of the U.S., Canadian, Japanese and U.K. stock prices to oil price shocks using quarterly data. Utilizing a standard cash-flow dividend valuation model, they found that for the United States and Canada this reaction can be accounted for entirely by the impact of oil shocks on real cash flows. The results for Japan and the United Kingdom were not as strong. Huang et al. (1996) used an unrestricted vector autoregression (VAR) model to examine the relationship between daily oil futures returns and daily U.S. stock returns. They found that oil futures returns lead some individual oil company stock returns, but they do not have much impact on broad-based market indices, such as the S & P 500. In a more recent study, Sadorsky (1999), using monthly data (1947:1-1996:4), examined the links between the U.S. fuel oil prices and the S & P 500 in an unrestricted VAR model that also included the short-term interest rate and industrial production. In contrast with Huang et al. …

Modelling prices in competitive electricity markets

Abstract: List of Contributors.Preface.1 Structural and Behavioural Foundations of Competitive Electricity Prices (Derek W. Bunn).PART I: PRICES AND STRATEGIC COMPETITION.2 Competitors' Response Representation for Market Simulation in the Spanish Daily Market (Efraim Centeno Hernaez, Julian Barquin Gil, Jose Ignacio de la Fuente Leon, Antonio Munoz San Roque, Mariano J. Ventosa Rodriguez, Javier Garcia Gonzalez, Alicia Mateo Gonzalez, and Agustin Martin Calmarza).2.1 Introduction.2.2 Hourly bidding-based Spanish electricity markets.2.3 A two-phase clustering procedure for the analysis of bid functions.2.4 Forecasting methods for residual demand functions using time series (ARIMA) models.2.5 Discovering electricity market states for forecasting the residual demand function using input output hidden Markov models.2.6 Conjectural variations approach for modelling electricity markets.2.7 Conclusions.Appendix: Nomenclature.References.3 Complementarity-Based Equilibrium Modeling for Electric Power Markets (Benjamin F. Hobbs and Udi Helman).3.1 Introduction.3.2 Definitions.3.3 A general complementarity-based model of energy commodity markets.3.4 A comparison of two approaches to modeling Cournot generators on a transmission network.3.5 A large-scale application: the North American Eastern Interconnection.3.6 Conclusion.Acknowledgments.References.4 Price Impact of Horizontal Mergers in the British Generation Market (John Bower).4.1 Introduction.4.2 England and Wales wholesale electricity market.4.3 Analysis.4.4 Price forecast.General references.Ofgem references.PART II: SPOT MARKET DYNAMICS.5 Testing for Weekly Seasonal Unit Roots in the Spanish Power Pool (Angel Le-on and Antonio Rubia).5.1 Introduction.5.2 Data.5.3 Testing for seasonal unit roots.5.4 Concluding remarks.Appendix A: Prewhitening procedure.Appendix B: Critical values of the HEGY test.Acknowledgements.References.6 Nonlinear Time Series Analysis of Alberta's Deregulated Electricity Market (Apostolos Serletis and Ioannis Andreadis).6.1 Introduction.6.2 A noise model.6.3 A multifractal formalism setting.6.4 On turbulent behavior.6.5 On nonlinearity.6.6 On chaos.6.7 Conclusion.Acknowledgments.References.7 Quantile-Based Probabilistic Models for Electricity Prices (Shi-Jie Deng and Wenjiang Jiang).7.1 Introduction.7.2 Quantile-based distributions and the modelling of marginal distributions of electricity price.7.3 Quantile-GARCH models and the modelling of time series of electricity price.7.4 Parameter Inference.7.5 Conclusion.Acknowledgements.References.8 Forecasting Time-Varying Covariance Matrices in the Intradaily Spot Market of Argentina (Angel Leon and Antonio Rubia).8.1 Introduction.8.2 VAR analysis for block bids.8.3 Modelling the conditional covariance matrix.8.4 Forecasting conditional covariance matrices.8.5 Concluding remarks.Acknowledgements.References.PART III: SPATIAL PRICE INTERACTIONS.9 Identifying Dynamic Interactions in Western US Spot Markets (Christine A. Jerko, James W. Mjelde and David A. Bessler).9.1 Introduction.9.2 Data.9.3 Methods.9.4 Results.9.5 Discussion.References.10 Transmission of Prices and Volatility in the Australian Electricity Spot Markets (Andrew C. Worthington and Helen Higgs).10.1 Introduction.10.2 Data and summary statistics.10.3 Multivariate GARCH model.10.4 Empirical results.10.5 Conclusion.References.PART IV: FORWARD PRICES.11 Forecasting Higher Moments of the Power Price Using Medium-Term Equilibrium Economics and the Value of Security of Supply (Chris Harris).11.1 Introduction.11.2 Construction of the moments of price.11.3 Worked example.11.4 Commentary.11.5 Conclusions.References.12 Modeling Electricity Forward Curve Dynamics in the Nordic Market (Nicolas Audet, Pirja Heiskanen, Jussi Keppo and Iivo Vehvilainen).12.1 Introduction.12.2 The model.12.3 Forward model in the Nordic market.12.4 Model usage examples.12.5 Conclusion.Appendix: Estimation of model parameters.Acknowledgments.References.13 The Forward Curve Dynamic and Market Transition Forecasts (Svetlana Borovkova).13.1 The term structure of commodity futures prices.13.2 Forecasting market transitions.13.3 Critical regions and bootstrap methods.13.4 Application to electricity and oil futures.13.5 Concluding remarks.References.PART V: FORECASTING AND RISK MANAGEMENT.14 Price Modelling for Profit at Risk Management (Jacob Lemming).14.1 Introduction.14.2 Electricity price modelling.14.3 A profit at risk risk management model.14.4 Modelling input parameters.14.5 Experimental results.14.6 Conclusions.References.15 ForecastingWeather Variable Densities for Weather Derivatives and Electricity Prices (James W. Taylor).15.1 Introduction.15.2 Weather ensemble predictions.15.3 Univariate time series modelling of weather variables.15.4 Empirical comparison of weather point forecasts.15.5 Empirical comparison of weather quantile forecasts.15.6 Summary of the analysis of temperature, wind speed and cloud cover.15.7 Forecasting the payoff density for a weather derivative.15.8 Electricity demand modelling.15.9 Concluding comments.References.Index.

Price Discovery and Volatility Spillovers in Index Futures Markets: Some Evidence from Mexico

Abstract: This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.

To Hedge or Not Against an Uncertain Climate Future

Abstract: The economically based study reported in this Policy Forum uses a modified DICE-99 modeling structure to explore the relative efficacy of implementing near-term mitigation policies as a hedge against model, calibration, and implementation uncertainties about temperature targets and climate sensitivity Implementing modest mitigation over the near term minimizes the expected cost of selecting equally likely temperature targets in 2035 across a recently calibrated probability distribution for climate sensitivity that extends up to 9ÂoC Hedging effectively "buys insurance" against future adjustment costs and is extremely robust across most possible futures, especially when compared with a wait-and-see strategy that would eschew mitigation over the first third of this century

The Productive Life of Risk

Abstract: Contemporary social theorists usually conceive of risk negatively. Focusing on disasters and hazards, they see risk as an object of calculation and avoidance. But we gain a deeper understanding of risk in modern life if we observe it in another setting. Futures markets are exemplary sites of aggressive risk taking. Drawing upon extensive fieldwork on trading floors, this article shows how a high modern institution creates populations of risk-taking specialists, and explores the ways that engagements with risk actively organize contemporary markets and forge economic actors. Financial exchanges are crucibles of capitalist production. At the Chicago Board of Trade, financial speculators structure their conduct and shape themselves around risk; and games organized around risk influence the social and spatial dynamics of market life.

Price discovery and volatility spillovers in index futures markets: Some evidence from Mexico

Abstract: This paper investigates the hypotheses that the recently established Mexican stock index futures market effectively serves the price discovery function, and that the introduction of futures trading has provoked volatility in the underlying spot market. We test both hypotheses simultaneously with daily data from Mexico in the context of a modified EGARCH model that also incorporates possible cointegration between the futures and spot markets. The evidence supports both hypotheses, suggesting that the futures market in Mexico is a useful price discovery vehicle, although futures trading has also been a source of instability for the spot market. Several managerial implications are derived and discussed.

Market interactions in returns and volatilities between spot and forward shipping freight markets

Abstract: The lead–lag relationship in both returns and volatilities between spot and futures markets has been investigated extensively in the financial economics literature. Only a limited number of such studies have appeared on forward markets, primarily due to the lack of easy access to empirical data. This paper uses a unique database in over-the-counter Forward Freight Agreements (FFA) to investigate the issue. The underlying commodity is non-storable, being that of a shipping service, with the additional feature of transactions costs being higher in the spot market in comparison to the forward market. These features have interesting implications for the markets. At the practical level, the better understanding of the mean and variance dynamics can improve risk management and budget planning decisions.

Suckers Are Born but Markets Are Made: Individual Rationality, Arbitrage, and Market Efficiency on an Electronic Futures Market

Abstract: The Iowa Electronic Markets are specially designed futures markets that appear to aggregate information efficiently to predict events such as election outcomes. Yet, in theory, perfect information aggregation is impossible. Further, the markets are populated by a nonrepresentative sample of mistake-prone and biased traders. That is, traders are prone to the behavioral anomalies predicted by behavioral finance. How can this be reconciled with market efficiency? Here, we take a first step by analyzing the behavior of two self-selected types of traders. Dramatic differences in mistake rates across traders can help us answer the question. Market-making traders who set prices are less mistake prone and appear to be more rational than price-taking traders. This highlights an important feature of markets: marginal (in this case, market making), not average, traders set prices. This can drive the efficiency of market prices in spite of large numbers of traders who display patently suboptimal behavior.

Modelling Dynamic Conditional Correlations in Wti Oil Forward and Futures Returns

Abstract: This paper estimates the dynamic conditional correlations in the returns on WTI oil one-month forward prices, and one-, three-, six-, and twelve-month futures prices, using recently developed multivariate conditional volatility models. The dynamic correlations enable a determination of whether the forward and various futures returns are substitutes or complements, which are crucial for deciding whether or not to hedge against unforeseen circumstances. The models are estimated using daily data on WTI oil forward and futures prices, and their associated returns, from 3 January 1985 to 16 January 2004. At the univariate level, the estimates are statistically significant, with the occasional asymmetric effect in which negative shocks have a greater impact on volatility than positive shocks. In all cases, both the short- and long-run persistence of shocks are statistically significant. Among the five returns, there are ten conditional correlations, with the highest estimate of constant conditional correlation being 0.975 between the volatilities of the three-month and six-month futures returns, and the lowest being 0.656 between the volatilities of the forward and twelve-month futures returns. The dynamic conditional correlations can vary dramatically, being negative in four of ten cases and being close to zero in another five cases. Only in the case of the dynamic volatilities of the three-month and six-month futures returns is the range of variation relatively narrow, namely (0.832, 0.996). Thus, in general, the dynamic volatilities in the returns in the WTI oil forward and future prices can be either independent or interdependent over time.

Price discovery in the hang seng index markets: Index, futures, and the tracker fund

Abstract: In this paper, price discovery among the Hang Seng Index markets is investigated using the Hasbrouck and Gonzalo and Granger common-factor models and the multivariate generalized autoregressive conditional heteroskedasticity (M-GARCH) model. Minute-by-minute data from the Hang Seng Index, Hang Seng Index futures, and the tracker fund show that the movements of the three markets are interrelated. The futures markets contain the most information, followed by the spot market. The tracker fund does not contribute to the price discovery process. The three markets exhibit spillover effects, indicating that their second moments are linked, even though the flow of information from the tracker fund to the other markets is minimal. Overall results suggest that the three markets have different degrees of information processing abilities, although they are governed by the same set of macroeconomic fundamentals. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:887–907, 2004

Bayesian Learning in Financial Markets - Testing for the Relevance of Information Precision in Price Discovery

Abstract: An important claim of Bayesian learning and a standard assumption in price discovery models is that the strength of the price impact of unanticipated information depends on the precision of the news. In this paper, we test for this assumption by analyzing intra-day price responses of CBOT T-bond futures to U.S. employment announcements. By employing additional detail information besides the widely used headline figures, we extract release-specific precision measures which allow to test for the claim of Bayesian updating. We find that the price impact of more precise information is significantly stronger. The results remain stable even after controlling for an asymmetric price response to 'good' and 'bad' news.

A selected review of agricultural commodity futures and options markets

Abstract: This paper provides a selected review of the research literature on commodity futures and options markets, focusing primarily on empirical studies. The topics featured include the development of intertemporal price relationships, hedging and basis relationships, price behaviour, and discussion of the markets' institutional issues. In each case the recent contributions are recognised. Using this base of information as background, we focus on identifying and motivating future research challenges for agricultural commodity futures and options markets. Copyright 2004, Oxford University Press.

Liquidity in the Futures Pits: Inferring Market Dynamics from Incomplete Data

Abstract: Motivated by economic models of sequential trade, empirical analyses of market dynamics frequently estimate liquidity as the coefficient of signed order flow in a price change regression. This paper implements such an analysis for futures transaction data from pit trading. To deal with the absence of timely bid and ask quotes (which are used to sign trades in most equity market studies), this paper proposes new techniques based on Markov chain Monte Carlo estimation. The model is estimated for four representative Chicago Mercantile Exchange contracts. The highest liquidity (lowest order flow coefficient) is found for the S&P 500 index. Liquidity for the Euro and U.K. £ contracts is somewhat lower. The pork belly contract exhibits the least liquidity.

The Euribor Futures Market: Efficiency and the Impact of ECB Policy Announcements

Abstract: For an effective and smooth monetary policy, it is important that interest rate expectations are in line with central bank policy intentions. The predictability of money market interest rates is, therefore, an indicator of transparency and clarity in the communication of monetary policy and of the effectiveness of monetary policy implementation. In this paper, we analyse three aspects of the predictability of money market rates in the European Monetary Union (EMU). The first is the efficiency of the three-month Euribor interest rate futures markets. The second aspect is the effect of ECB policy announcements on the volatility of Euribor futures rates, and the third aspect is the effect of ECB policy announcements on the prediction error contained in Euribor futures rates. We find that the new Euro money markets were able to predict short-term rates well. Our results suggest that the ECB communication of monetary policy has worked well during the first years of EMU and that the predictability of ECB policy decisions seems to have improved over time. ECB Council decisions still cause some surprises, but their effect on volatility is small.

A Markov regime switching approach for hedging stock indices

Abstract: In this paper we describe a new approach for determining time-varying minimum variance hedge ratio in stock index futures markets by using Markov Regime Switching (MRS) models. The rationale behind the use of these models stems from the fact that the dynamic relationship between spot and futures returns may be characterized by regime shifts, which, in turn, suggests that by allowing the hedge ratio to be dependent upon the “state of the market,” one may obtain more efficient hedge ratios and hence, superior hedging performance compared to other methods in the literature. The performance of the MRS hedge ratios is compared to that of alternative models such as GARCH, Error Correction and OLS in the FTSE 100 and S&P 500 markets. In and out-of-sample tests indicate that MRS hedge ratios outperform the other models in reducing portfolio risk in the FTSE 100 market. In the S&P 500 market the MRS model outperforms the other hedging strategies only within sample. Overall, the results indicate that by using MRS models market agents may be able to increase the performance of their hedges, measured in terms of variance reduction and increase in their utility. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:649–674, 2004

The Profitability of Technical Analysis: A Review

Abstract: The purpose of this report is to review the evidence on the profitability of technical analysis. The empirical literature is categorized into two groups, "early" and "modern" studies, according to the characteristics of testing procedures. Early studies indicated that technical trading strategies were profitable in foreign exchange markets and futures markets, but not in stock markets before the 1980s. Modern studies indicated that technical trading strategies consistently generated economic profits in a variety of speculative markets at least until the early 1990s. Among a total of 92 modern studies, 58 studies found positive results regarding technical trading strategies, while 24 studies obtained negative results. Ten studies indicated mixed results. Despite the positive evidence on the profitability of technical trading strategies, it appears that most empirical studies are subject to various problems in their testing procedures, e.g., data snooping, ex post selection of trading rules or search technologies, and difficulties in estimation of risk and transaction costs. Future research must address these deficiencies in testing in order to provide conclusive evidence on the profitability of technical trading strategies.

The European Bond Markets under EMU

Abstract: In this paper, we document how, in the wake of monetary unification, the markets for euro-area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the euro-area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets. Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that euro-area bonds are still not perfect substitutes. However, to a large extent, this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk. The challenges still lying ahead are numerous. They include: the imbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets' prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by euro-area countries; the integration of clearing and settlement systems in the euro-area bond market; and the participation of new accession countries' issuers in this market. Copyright 2004, Oxford University Press.

Method for valuing forwards, futures and options on real estate

Abstract: A system and method for matching buy and sell orders is provided A daily cash index of real estate values for a local region is maintained and a trading instrument representative of an interest in real estate in the local region is created In this regard, a cash settlement of the trading instrument is a function of the daily cash index on the date of said cash settlement In addition, a plurality of buy orders relating to the instrument are generated; a plurality of sell orders relating to the instrument are generated; and the buy and sell orders are matched to determine a purchase and sale of the instrument

The European Bond Markets Under EMU

Abstract: In this paper, we document how in the wake of monetary unification the markets for Euro-area sovereign and private-sector bonds have become increasingly integrated. Issuers and investors alike have come to regard the Euro-area bond market as a single one. Primary and secondary bond markets have become increasingly integrated on a pan-European scale. Issuance of corporate bonds has taken off on an unprecedented scale in continental Europe. In the process, both investors and issuers have reaped the considerable benefits afforded by greater competition in the underwriting of private bonds and auctioning of public ones, and by the greater liquidity of secondary markets. Bond yields have converged dramatically in the transition to EMU. The persistence of small and variable yield differentials for sovereign debt under EMU indicates that Euro-area bonds are still not perfect substitutes. However, to a large extent this does not reflect persistent market segmentation but rather small differentials in fundamental risk. Liquidity differences play at most a minor role, and this role appears to arise partly from their interaction with fundamental risk. The challenges still lying ahead are numerous. They include the unbalance between the German-dominated futures and the underlying cash market; the vulnerability of the cash markets' prices to free-riding and manipulation by large financial institutions; the possibility of joint bond issuance by Euro-area countries; the integration of clearing and settlement systems in the Euro-area bond market, and the participation of new accession countries' issuers to this market.

Futures trading, spot market volatility, and market efficiency: The case of the Korean index futures markets

Abstract: We examine the effect of the introduction of index futures trading in the Korean markets on spot price volatility and market efficiency of the underlying KOSPI 200 stocks, relative to the carefully matched non-KOSPI 200 stocks. Employing both an event study approach and a matching-sample approach for the market data during the period of January 1990–December 1998, we find that the introduction of KOSPI 200 index futures trading is associated with greater market efficiency but, at the same time, greater spot price volatility in the underlying stock market. We also find that KOSPI 200 stocks experience lower spot price volatility and higher trading efficiency than non-KOSPI 200 stocks after the introduction of futures trading. The trading efficiency gap between the two groups of stocks, however, declines over time and vanishes following the addition of options trading. Overall, our results suggest that while futures trading in Korea increases spot price volatility and market efficiency, there exists volatility spillover to stocks against which futures are not traded. We provide several factors unique in the Korean markets including circuit breakers, sidercar system, restrictions on foreign ownership, and inactive program trading as potential factors to explain some of our puzzling evidence. We further consider the potential effect of changes in daily price limits utilized by the Korea Stock Exchange during the testing period on our empirical findings. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1195–1228, 2004

Should We Fear Derivatives

Abstract: This paper discusses the extent to which derivatives pose threats to firms and to the economy. After reviewing the derivatives markets and putting in perspective the various measures of the size of these markets, the paper shows who uses derivatives and why. The difficulties firms face in valuing derivatives portfolios are evaluated. Although academics pay much attention to no-arbitrage pricing results, the paper points out that there can be considerable subjectivity in the pricing of derivatives that do not have highly liquid markets. It is shown that the known risks of derivatives portfolios can generally be measured and managed well at the firm level. However, derivatives can create systemic risks when a market participant becomes excessively large relative to particular derivatives markets. Overall, the benefits of derivatives outweigh the potential threats.

Causality and price discovery: an application of directed acyclic graphs

Abstract: Directed Acyclic Graphs (DAG's) and Error Correction Models (ECM's) are employed to analyze questions of price discovery between spatially separated commodity markets and the transportation market linking them together. Results from our analysis suggest these markets are highly interconnected but it is the inland commodity market that is strongly influenced by both the transportation and commodity export markets. However, the commodity markets affect the volatility of the transportation market over longer horizons. Our results suggest that transportation rates are critical in the price discovery process lending support for the recent development of exchange traded barge rate futures contracts.