Showing papers on "Futures contract published in 2011"

Betting Against Beta

Abstract: We present a model with leverage and margin constraints that vary across investors and time. We find evidence consistent with each of the model’s five central predictions: (1) Since constrained investors bid up high-beta assets, high beta is associated with low alpha, as we find empirically for U.S. equities, 20 international equity markets, Treasury bonds, corporate bonds, and futures; (2) A betting-against-beta (BAB) factor, which is long leveraged low beta assets and short high-beta assets, produces significant positive risk-adjusted returns; (3) When funding constraints tighten, the return of the BAB factor is low; (4) Increased funding liquidity risk compresses betas toward one; (5) More constrained investors hold riskier assets.

Time Series Momentum

Abstract: We document significant “time series momentum” in equity index, currency, commodity, and bond futures for each of the 58 liquid instruments we consider. We find persistence in returns for 1 to 12 months that partially reverses over longer horizons, consistent with sentiment theories of initial under-reaction and delayed over-reaction. A diversified portfolio of time series momentum strategies across all asset classes delivers substantial abnormal returns with little exposure to standard asset pricing factors and performs best during extreme markets. Examining the trading activities of speculators and hedgers, we find that speculators profit from time series momentum at the expense of hedgers.

Theory of Financial Risk and Derivative Pricing: From Statistical Physics to Risk Management

Abstract: Foreword Preface 1. Probability theory: basic notions 2. Maximum and addition of random variables 3. Continuous time limit, Ito calculus and path integrals 4. Analysis of empirical data 5. Financial products and financial markets 6. Statistics of real prices: basic results 7. Non-linear correlations and volatility fluctuations 8. Skewness and price-volatility correlations 9. Cross-correlations 10. Risk measures 11. Extreme correlations and variety 12. Optimal portfolios 13. Futures and options: fundamental concepts 14. Options: hedging and residual risk 15. Options: the role of drift and correlations 16. Options: the Black and Scholes model 17. Options: some more specific problems 18. Options: minimum variance Monte-Carlo 19. The yield curve 20. Simple mechanisms for anomalous price statistics Index of most important symbols Index.

Investor Flows and the 2008 Boom/Bust in Oil Prices

Abstract: This paper explores the impact of investor flows and financial market conditions on returns in crude-oil futures markets. I begin with a review of the economic mechanisms by which informational frictions and the associated speculative activity may induce prices to drift away from fundamental" values and show increased volatility. This is followed by a discussion of the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity. Finally, I present new evidence that there was an economically and statistically significant effect of investor flows on futures prices, after controlling for returns in US and emerging-economy stock markets, a measure of the balance-sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The intermediate-term growth rates of index positions and managed-money spread positions had the largest impacts on futures prices.

Index Funds, Financialization, and Commodity Futures Markets

Abstract: Some market participants and policy-makers believe that index fund investment was a major driver of the 2007-2008 spike in commodity futures prices. One group of empirical studies does find evidence that commodity index investment had an impact on the level of futures prices. However, the data and methods used in these studies are subject to criticisms that limit the confidence one can place in their results. Moreover, another group of studies provides no systematic evidence of a relationship between positions of index funds and the level of commodity futures prices. The lack of a direct empirical link between index fund trading and commodity futures prices casts considerable doubt on the belief that index funds fueled a price bubble. Copyright 2011, Oxford University Press.

Do Speculators Drive Crude Oil Futures Prices

Abstract: The coincident rise in crude oil prices and increased number of financial participants in the crude oil futures market from 2000―2008 has led to allegations that "speculators" drive crude oil prices. As crude oil futures peaked at $147/ bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes; the results instead suggest that price changes precede their position changes.

Should Investors Include Commodities in Their Portfolios After All? New Evidence

Abstract: This paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes. First, we revisit the posed question within an in-sample setting by employing mean–variance and non-mean–variance spanning tests. Then, we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out-of-sample performance. Under the in-sample setting, we find that commodities are beneficial only to non-mean–variance investors. However, these benefits are not preserved out-of-sample. Our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures, utility functions and datasets. The results hold even when transaction costs are considered and across various sub-periods. Not surprisingly, the only exception appears over the 2005–2008 unprecedented commodity boom period.

Forecasting the Price of Oil

Abstract: We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries?

Should investors include commodities in their portfolios after all? New evidence

Abstract: This paper investigates whether an investor is made better off by including commodities in a portfolio that consists of traditional asset classes. First, we revisit the posed question within an in-sample setting by employing mean–variance and non-mean–variance spanning tests. Then, we form optimal portfolios by taking into account the higher order moments of the portfolio returns distribution and evaluate their out-of-sample performance. Under the in-sample setting, we find that commodities are beneficial only to non-mean–variance investors. However, these benefits are not preserved out-of-sample. Our findings challenge the alleged diversification benefits of commodities and are robust across a number of performance evaluation measures, utility functions and datasets. The results hold even when transaction costs are considered and across various sub-periods. Not surprisingly, the only exception appears over the 2005–2008 unprecedented commodity boom period.

The Chinese Warrants Bubble

Abstract: In 2005-2008, over a dozen put warrants traded in China went so deep out of the money that they were almost certain to expire worthless. Nonetheless, each warrant was traded more than three times each day at substantially inflated prices. This bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities. This sample allows us to examine a set of bubble theories. In particular, our analysis highlights the joint effects of short-sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature. (JEL G12, G13, O16, P34)

Demand for alternative-fuel vehicles when registration taxes are high

Abstract: This paper investigates the potential futures for alternative-fuel vehicles in Denmark, where the vehicle registration tax is very high and large tax rebates can be given. A large stated choice dataset has been collected concerning vehicle choice among conventional, hydrogen, hybrid, bio-diesel, and electric vehicles. We estimate a mixed logit model that improves on previous contributions by controlling for reference dependence and allowing for correlation of random effects. Both improvements are found to be important. An application of the model shows that alternative-fuel vehicles with present technology could obtain fairly high market shares given tax regulations possible in the present high-tax vehicle market.

Is There Co-Movement of Agricultural Commodities Futures Prices and Crude Oil?

Abstract: Even though significant attempts have appeared in literature, the current perception of co-movement of commodity prices appear inadequate and static. In particular we focus on price movements between crude oil futures and a series of agricultural commodities and gold futures. A comparative framework is applied to identify changes in relationships through time and various cointegration methodologies and causality tests are employed. Our results indicate that co-movement is a dynamic concept and that some economic and policy development may change the relationship between commodities. Furthermore we show that biofuel policy buffers the co-movement of crude oil and corn futures until the crude oil prices surpass a certain threshold.

The Impact of Yield-Dependent Trading Costs on Pricing and Production Planning Under Supply Uncertainty

Abstract: This paper studies the role of the yield-dependent trading cost structure influencing the optimal choice of the selling price and production quantity for a firm that operates under supply uncertainty in the agricultural industry. The firm initially leases farm space, but its realized amount of fruit supply fluctuates because of weather conditions, diseases, etc. At the end of the growing season, the firm has three options: convert its crop supply to the final product, purchase additional supplies from other growers, and sell some (or all) of its crop supply in the open market without converting to the finished product. We consider the problem both from a risk-neutral and a risk-averse perspective with varying degrees of risk aversion. The paper offers three sets of contributions: (1) It shows that the use of a static cost exaggerates the initial investment in the farm space and the expected profit significantly, and the actual value gained from a secondary (emergency) option for an agricultural firm is lower under the yield-dependent cost structure. (2) It proves that although the risk-neutral firm does not benefit from fruit futures, a sufficiently risk-averse firm can benefit from the presence of a fruit futures market. The same risk-averse firm does not purchase fruit futures when it operates under static costs. Thus, fruit futures can only add value under yield-dependent trading costs. (3) Contrary to the results presented for the newsvendor problem under demand uncertainty, the firm does not always commit to a lower initial quantity (leased farm space) under risk aversion. Rather, the firm might lease a larger farm space under risk aversion.

The Impact of Index Funds in Commodity Futures Markets: A Systems Approach

Abstract: This article addresses the debate regarding the role of index funds in commodity futures markets. Many have argued that index funds are speculators that are responsible for bubbles in commodity futures prices. The argument is based on the premise that the sheer size of index investment can overwhelm the normal functioning of these markets. Importantly, an empirical linkage must be made between commodity index fund positions and prices, or there is no obvious mechanism by which a bubble can form. The authors’ empirical analysis uses new data from the U.S. Commodity Futures Trading Commission contained in the “Disaggregated Commitments of Traders” report. Grangerstyle causality regressions provide no convincing evidence that positions held by swap dealers impact market returns. Surprisingly, the results do suggest that larger commodity index positions are associated with declining market volatility, although these results may be market specific.

Price Discovery and Volatility Spillovers in the European Union Emissions Trading Scheme: A High-Frequency Analysis

Abstract: This paper deals with the modeling of the relationship of European Union Allowance spot- and futures-prices within the second commitment period of the European Union Emission Trading Scheme. Based on high frequency data, we analyze causality in the first and the second conditional moments. To reveal long run price discovery we compute the common factor weights proposed by Schwarz and Szakmary (1994) and the information share proposed by Hasbrouck (1995) based on the estimated coefficients of a vector error correction model. To analyze the short run dynamics we perform Granger causalty tests. The GARCH-BEKK model introduced by Engle and Kroner (1995) is employed to analyze the volatility transmission structure. We identify the futures market to be the leader of the long run price discovery process whereas a bidirectional short run causality structure is observed. Furthermore, we detect unidirectional volatility transmission from the futures to the spot market at highest frequencies.

Multifractal Detrended Cross-Correlation Analysis of agricultural futures markets

Abstract: We investigated geographically far but temporally correlated China’s and US agricultural futures markets. We found that there exists a power-law cross-correlation between them, and that multifractal features are significant in all the markets. It is very interesting that the geographically far markets show strong cross-correlations and share much of their multifractal structure. Furthermore, we found that for all the agricultural futures markets in our studies, the cross-correlation exponent is less than the averaged generalized Hurst exponents (GHE) when q 0.

Volatility spillover effects and cross hedging in corn and crude oil futures

Abstract: Using a volatility spillover model, we find evidence of significant spillovers from crude oil prices to corn cash and futures prices, and that these spillover effects are time-varying. Results reveal that corn markets have become much more connected to crude oil markets after the introduction of the Energy Policy Act of 2005. Furthermore, when the ethanol–gasoline consumption ratio exceeds a critical level, crude oil prices transmit positive volatility spillovers into corn prices and movements in corn prices are more energy-driven. Based on this strong volatility link between crude oil and corn prices, a new cross-hedging strategy for managing corn price risk using oil futures is examined and its performance is studied. Results show that this cross-hedging strategy provides only slightly better hedging performance compared with traditional hedging in corn futures markets alone. The implication is that hedging corn price risk in corn futures markets alone can still provide relatively satisfactory performance in the biofuel era. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

Nonlinear bivariate dependency of price–volume relationships in agricultural commodity futures markets: A perspective from Multifractal Detrended Cross-Correlation Analysis

Abstract: Nonlinear dependency between characteristic financial and commodity market quantities (variables) is crucially important, especially between trading volume and market price. Studies on nonlinear dependency between price and volume can provide practical insights into market trading characteristics, as well as the theoretical understanding of market dynamics. Actually, nonlinear dependency and its underlying dynamical mechanisms between price and volume can help researchers and technical analysts in understanding the market dynamics by integrating the market variables, instead of investigating them in the current literature. Therefore, for investigating nonlinear dependency of price–volume relationships in agricultural commodity futures markets in China and the US, we perform a new statistical test to detect cross-correlations and apply a new methodology called Multifractal Detrended Cross-Correlation Analysis (MF-DCCA), which is an efficient algorithm to analyze two spatially or temporally correlated time series. We discuss theoretically the relationship between the bivariate cross-correlation exponent and the generalized Hurst exponents for time series of respective variables. We also perform an empirical study and find that there exists a power-law cross-correlation between them, and that multifractal features are significant in all the analyzed agricultural commodity futures markets.

Landscape futures analysis: Assessing the impacts of environmental targets under alternative spatial policy options and future scenarios

Abstract: Environmental targets are often used in planning for sustainable agricultural landscapes but their impacts are rarely known. In this paper we introduce landscape futures analysis as a method which combines linear programming optimisation with scenario analysis in quantifying the environmental, economic, and social impacts associated with achieving environmental targets, on a landscape scale. We applied the technique in the Lower Murray in southern Australia. Landscape futures models were used to identify specific geographic locations in the landscape for six natural resource management (NRM) actions such that regional environmental targets are achieved. The six potential NRM actions that may be undertaken to achieve environmental targets include remnant vegetation management, ecological restoration, conservation farming, deep-rooted perennials, and the production of biomass and biofuels feedstock for renewable energy generation. We developed landscape futures under four alternative spatial prioritisation policy options and four future climate and commodity price scenarios. The impacts of each landscape future were calculated across a range of environmental, economic, and social indicators. The external drivers, climate change and commodity prices, and internal decisions such as policy options for spatially prioritising NRM actions, both have a strong influence on the costs and benefits of achieving environmental targets. Illustrative results for the cleared agricultural areas in the Mallee region indicate that whilst achieving targets can have substantial environmental benefits, it requires large areas of land use and land management change, and is likely to be costly (up to $348.5 M per year) with flow-on impacts on the regional economy and communities. Environmental targets can be achieved more cost-effectively through spatial planning. Costs can be further reduced if markets are established for carbon, biomass, and biofuels to enable landholders to generate income from undertaking NRM. Landscape futures analysis is an effective tool for supporting the strategic regional NRM policy and planning decisions of how best to set and achieve environmental targets.

Crop Price Indemnified Loans for Farmers: A Pilot Experiment in Rural Ghana

Abstract: Farmers face a particular set of risks that complicate the decision to borrow. We use a randomized experiment to investigate (1) the role of crop-price risk in reducing demand for credit among farmers and (2) how risk mitigation changes farmers' investment decisions. In Ghana, we offer farmers loans with an indemnity component that forgives 50 percent of the loan if crop prices drop below a threshold price. A control group is offered a standard loan product at the same interest rate. Loan uptake is high among all farmers and the indemnity component has little impact on uptake or other outcomes of interest. INTRODUCTION Farmers face a particular set of risks that complicate the decision to borrow. Factors that are almost entirely unforeseeable and outside of their control, such as crop prices and weather patterns, have an enormous impact on farmers' fortunes--and on their ability to repay any loans they have taken. As such, some farmers are believed reluctant to take loans to finance seemingly profitable ideas for fear of not being able to repay. Paradoxically, from a bank's perspective, these may be excellent clients. They are so trustworthy that they are not borrowing out of fear of default. Can a loan product with a component that mitigates farmers' risk successfully encourage farmers to take, and benefit from, credit? What type of individuals is more likely to borrow when some of the risk is mitigated? And lastly but equally importantly, how does the mitigation of risk change farmers' investment decisions, such as the purchase of inputs? Most of the theoretical literature on the impact of credit constraints on productivity focuses on supply-side constraints. In a recent departure, Boucher, Carter, and Guirkinger (2008) argue that in the presence of moral hazard, farmers will prefer not to borrow even though the loan would raise their productivity and expected income. Using panel data from Peru, they identify these "risk rationed" (as opposed to quantity rationed) households as households who never tried to access the formal market because of the high risk associated with borrowing due to consequences of default, and show that risk rationing adversely affects the productivity of these households. Based on this, they argue that improvements in the insurance offered to these households would increase their willingness to participate in formal credit markets and raise household welfare. As farmers weigh their ability to generate sufficient crop revenue to repay loans, one of the primary risks they face is price variability, which can be very high between and within growing seasons. In terms of price risk management, Morgan (2001) reviews the literature on reducing price risk through support and stabilization measures (e.g., International Commodity Agreements). Price support--often through marketing boards--has been a common but generally unsustainable policy. Because of the risks and politics involved in maintaining international boards, there has been a broad trend to liberalize agricultural markets, shifting price risk onto producers and traders, and furthermore, the boards typically are only setup for dominant export crops. Due to these difficulties with International Commodity Agreements, Morgan (1999, 2001) outlines theoretical justification for the demand for futures markets and other risk-management tools in developing countries but suggests that few systems are implemented successfully in practice, due to frequently unsatisfied infrastructural requirements. Although in theory the most efficient approach, futures markets are not readily available for many farmers and crops, in particular for farmers in developing countries. Carter (1999) surveys the literature on reducing price variability through derivatives such as futures and options markets. Such markets remain relatively uncommon in developing countries, however, and even where they exist, they are primarily accessible to large-volume producers and traders rather than smallholder farmers (Varangis and Larson, 1996). …

Price discovery and investor structure in stock index futures

Abstract: Previous literature on price discovery in stock index futures and spot markets neglects the role of different investor groups. This study relates time-varying spot-futures linkages studied within a VECM-DCC-GARCH framework to changes in the investor structure of the futures market over time. Empirical results suggest that during the dominance of presumably uninformed private investors, the futures market does not contribute to price discovery. By contrast, there is evidence of information flows from futures to spot markets and a significant increase in conditional correlation between both markets as institutional investors' share in trading volume increases. We derive implications for the design of emerging futures markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark31:282–306, 2011

The Future of Futures: The Time of Money in Financing and Society

Abstract: Contents: Introduction FIRST PART 1. Time in Economics 2. Time Binding 3. Economy is Time: Needs and Scarcity 4. Money 5. The Market 6. Financial Markets SECOND PART 7. Paper Finance and the Relationship to the World 8. Derivatives 9. The Production of the Future 10. Trading Uncertainty THIRD PART 11. The Crisis - Presuppositions 12. The Crisis - Evolution 13. The Crisis - Regulation Literature

Affect and Security: Exercising Emergency in ‘UK Civil Contingencies’

Abstract: In this paper we explore the relation between affect and security through a case study of one technique for making futures present and actionable: The use of exercises in UK emergency planning after the 2004 Civil Contingencies Act. Based on observation of exercises and interviews with emergency planners, we show how exercises function by making present an ‘interval’ of emergency in between the occurrence of a threatening event and its becoming a disaster. This ‘interval’ is made present through a set of partially connected affective atmospheres and sensibilities. By making futures present at the level of affect, exercises function as techniques of equivalence that enable future disruptive events to be governed. Through this case study we argue against epochal accounts that frame the relation between affect and security in terms of an ‘age of anxiety’ or a ‘culture of fear’. Instead, we understand security affects to be both a means through which futures are made present in apparatuses of security and a p...

Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle

Abstract: Diversification return is an incremental return earned by a rebalanced portfolio of assets. The diversification return of a rebalanced portfolio is often incorrectly ascribed to a reduction in variance. We argue that the underlying source of the diversification return is the rebalancing, which forces the investor to sell assets that have appreciated in relative value and buy assets that have declined in relative value, as measured by their weights in the portfolio. In contrast, the incremental return of a buy-and-hold portfolio is driven by the fact that the assets that perform the best become a greater fraction of the portfolio. We use these results to resolve two puzzles associated with the Gorton and Rouwenhorst index of commodity futures, and thereby obtain a clear understanding of the source of the return of that index. Diversification return can be a significant source of return for any rebalanced portfolio of volatile assets.