Journal of Futures Markets

article

Corporate usage of financial derivatives, information asymmetry, and insider trading

Hoa Nguyen, Robert Faff, Allan Hodgson

Journal of Futures Markets > 30 > 1 > 25 - 47

This article investigates whether financial derivative usage by Australian corporations constitutes information asymmetry when proxied by profitable trading in the firms' securities by insiders. The findings show that insiders who trade in companies that employ derivatives make larger purchase returns compared to insiders in nonuser firms with regard to trading identity, trading intensity, variability...

article

Estimation and hedging effectiveness of time‐varying hedge ratio: Flexible bivariate garch approaches

Sung Yong Park, Sang Young Jei

Journal of Futures Markets > 30 > 1 > 71 - 99

Bollerslev's (1990, Review of Economics and Statistics, 52, 5–59) constant conditional correlation and Engle's (2002, Journal of Business & Economic Statistics, 20, 339–350) dynamic conditional correlation (DCC) bivariate generalized autoregressive conditional heteroskedasticity (BGARCH) models are usually used to estimate time‐varying hedge ratios. In this study, we extend the above model to...

article

The CBOE S&P 500 three‐month variance futures

Jin E. Zhang, Yuqin Huang

Journal of Futures Markets > 30 > 1 > 48 - 70

In this article, we study the market of the Chicago Board Options Exchange S&P 500 three‐month variance futures that were listed on May 18, 2004. By using a simple mean‐reverting stochastic volatility model for the S&P 500 index, we present a linear relation between the price of fixed time‐to‐maturity variance futures and the VIX². The model prediction is supported by empirical tests. We find...

article

Local trader profitability in futures markets: Liquidity and position taking profits

Alex Frino, Elvis Jarnecic, Roger Feletto

Journal of Futures Markets > 30 > 1 > 1 - 24

This study examines the profitability of local traders on floor‐traded futures markets. Using unique data from the period of floor trading on the Sydney Futures Exchange, local income is decomposed into liquidity and position‐taking profit components. Locals on the trading floor are found to make significant position‐taking profits. Moreover, the ability of locals on the floor to derive position‐taking...

article

Do small traders contribute to price discovery? Evidence from the Hong Kong Hang Seng Index markets

Libin Tao, Frank M. Song

Journal of Futures Markets > 30 > 2 > 156 - 174

Using one‐contract‐size trades in the Mini Hang Seng Index futures to proxy the activities of small traders, this study empirically investigates the information contribution of small futures traders to price discovery on the Hang Seng Index (HSI) markets. Estimated with the models of Gonzalo, J., and Granger, C. W. J. (1995) and Hasbrouck, J. (1995), the results show that small traders contribute...

article

Threshold levels, strike price grid, and other market microstructure issues associated with exchange‐traded equity options

Edwin D. Maberly, Raylene M. Pierce, Patrick Catania

Journal of Futures Markets > 30 > 2 > 188 - 201

This study addresses a number of important market microstructure issues associated with exchange‐traded equity options having significant research implications for studies investigating clustering on option strike prices. Price threshold levels associated with exchange listing and the automatic exercise of equity options as established by the Securities and Exchange Commission and Options Clearing...

article

Pricing American options by canonical least‐squares Monte Carlo

Qiang Liu

Journal of Futures Markets > 30 > 2 > 175 - 187

Options pricing and hedging under canonical valuation have recently been demonstrated to be quite effective, but unfortunately are only applicable to European options. This study proposes an approach called canonical least‐squares Monte Carlo (CLM) to price American options. CLM proceeds in three stages. First, given a set of historical gross returns (or price ratios) of the underlying asset for a...

article

A maximal affine stochastic volatility model of oil prices

W. Keener Hughen

Journal of Futures Markets > 30 > 2 > 101 - 133

This study develops and estimates a stochastic volatility model of commodity prices that nests many of the previous models in the literature. The model is an affine three‐factor model with one state variable driving the volatility and is maximal among all such models that are also identifiable. The model leads to quasi‐analytical formulas for futures and options prices. It allows for time‐varying...

article

The information content of implied volatility: Evidence from Australia

Bart Frijns, Christian Tallau, Alireza Tourani‐Rad

Journal of Futures Markets > 30 > 2 > 134 - 155

This study develops an implied volatility index for the Australian stock market, termed as the AVX, and assesses its information content. The AVX is constructed using S&P/ASX 200 index options with a constant time‐to‐maturity of three months. It is observed that the AVX has a significant negative and asymmetric relationship with S&P/ASX 200 returns. When evaluating the forecasting power of...

article

Narrow framing: Professions, sophistication, and experience

Yu‐Jane Liu, Ming‐Chun Wang, Longkai Zhao

Journal of Futures Markets > 30 > 3 > 203 - 229

We document support for the narrow framing effect proposed by Tversky, A. and Kahneman, D. (1981). Our findings that traders in an options market frame complicated investment decisions into simpler ones support the narrow framing effect. Traders' professionalism, sophistication, and trading experience are negatively correlated with the degree of narrow framing, implying that these factors help to...

article

Do volatility determinants vary across futures contracts? Insights from a smoothed Bayesian estimator

Berna Karali, Jeffrey H. Dorfman, Walter N. Thurman

Journal of Futures Markets > 30 > 3 > 257 - 277

We apply a new Bayesian approach to multiple‐contract futures data. It allows the volatility of futures prices to depend upon physical inventories and the contract's time to delivery—and it allows those parametric effects to vary over time. We investigate price movements for lumber contracts over a 13‐year period and find a time‐varying negative relationship between lumber inventories and lumber futures...

article

The effects of skewness on optimal production and hedging decisions: An application of the skew‐normal distribution

Donald Lien

Journal of Futures Markets > 30 > 3 > 278 - 289

Assume that the spot price has a skew‐normal distribution. This study investigates the effect of skewness on optimal production and hedging decisions. It is shown that skewness has no effect on the optimal production level but induces the firm to become more active in futures trading. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:278–289, 2010

article

Volatility components: The term structure dynamics of VIX futures

Zhongjin Lu, Yingzi Zhu

Journal of Futures Markets > 30 > 3 > 230 - 256

In this study we empirically study the variance term structure using volatility index (VIX) futures market. We first derive a new pricing framework for VIX futures, which is convenient to study variance term structure dynamics. We construct five models and use Kalman filter and maximum likelihood method for model estimations and comparisons. We provide evidence that a third factor is statistically...

article

Dealing with downside risk in a multi‐commodity setting: A case for a “Texas hedge”?

Gabriel J. Power, Dmitry Vedenov

Journal of Futures Markets > 30 > 3 > 290 - 304

This study analyzes the problem of multi‐commodity hedging from the downside risk perspective. The lower partial moments (LPM₂)‐minimizing hedge ratios for the stylized hedging problem of a typical Texas panhandle feedlot operator are calculated and compared with hedge ratios implied by the conventional minimum‐variance (MV) criterion. A kernel copula is used to model the joint distributions of cash...

article

The impact of off‐market trading on liquidity: Evidence from the Australian options market

Andrew Lepone, Jin Young Yang

Journal of Futures Markets > 30 > 4 > 361 - 377

This study investigates the impact of reducing the contract size threshold for off‐market trading on transaction costs in an options market. This study provides evidence that market makers compete more aggressively for small‐to‐medium trades and quote mid‐size depths more often after the regime change. Results also indicate that small‐to‐medium trades incur lower transaction costs; however, large...

article

Option prices and risk‐neutral densities for currency cross rates

Stephen J. Taylor, Yaw‐Huei Wang

Journal of Futures Markets > 30 > 4 > 324 - 360

The theoretical relationship between the risk‐neutral density (RND) of the euro/ pound cross rate and the bivariate RND of the dollar/euro and the dollar/pound rates is derived; the required bivariate RND is defined by the dollar‐rate marginal RNDs and a copula function. The cross‐rate RND can be used by banks, international businesses, and central bankers to assess market expectations, to measure...

article

Erratum to "Do Small Traders Contribute to Price Discovery? Evidence from the Hong Kong Hang Seng Index Markets"

Journal of Futures Markets > 30 > 4 > 407 - 407

article

The economic significance of conditional skewness in index option markets

Ranjini Jha, Madhu Kalimipalli

Journal of Futures Markets > 30 > 4 > 378 - 406

This study examines whether conditional skewness forecasts of the underlying asset returns can be used to trade profitably in the index options market. The results indicate that a more general skewness‐based option‐pricing model can generate better trading performance for strip and strap trades. The results show that conditional skewness model forecasts, when combined with forward‐looking option implied...

article

The bias in time series volatility forecasts

Louis H. Ederington, Wei Guan

Journal of Futures Markets > 30 > 4 > 305 - 323

By Jensen's inequality, a model's forecasts of the variance and standard deviation of returns cannot both be unbiased. This study explores the bias in GARCH type model forecasts of the standard deviation of returns, which we argue is the more appropriate volatility measure for most financial applications. For a wide variety of markets, the GARCH, EGARCH, and GJR (or TGARCH) models tend to persistently...

article

General equilibrium and preference free model for pricing options under transformed gamma distribution

Luiz Vitiello, Ser‐Huang Poon

Journal of Futures Markets > 30 > 5 > 409 - 431

The gamma class of distributions encompasses several important distributions, either as special or limiting cases or through simple transformations. Here we derived closed form and preference free European option pricing formulae for various (transformed) gamma distributions under the general equilibrium RNVR framework. The gamma class of distributions is used historically in hydrology for modelling...

INFONA - science communication portal

Journal of Futures Markets

Corporate usage of financial derivatives, information asymmetry, and insider trading

Estimation and hedging effectiveness of time‐varying hedge ratio: Flexible bivariate garch approaches

The CBOE S&P 500 three‐month variance futures

Local trader profitability in futures markets: Liquidity and position taking profits

Do small traders contribute to price discovery? Evidence from the Hong Kong Hang Seng Index markets

Threshold levels, strike price grid, and other market microstructure issues associated with exchange‐traded equity options

Pricing American options by canonical least‐squares Monte Carlo

A maximal affine stochastic volatility model of oil prices

The information content of implied volatility: Evidence from Australia

Narrow framing: Professions, sophistication, and experience

Do volatility determinants vary across futures contracts? Insights from a smoothed Bayesian estimator

The effects of skewness on optimal production and hedging decisions: An application of the skew‐normal distribution

Volatility components: The term structure dynamics of VIX futures

Dealing with downside risk in a multi‐commodity setting: A case for a “Texas hedge”?

The impact of off‐market trading on liquidity: Evidence from the Australian options market

Option prices and risk‐neutral densities for currency cross rates

Erratum to "Do Small Traders Contribute to Price Discovery? Evidence from the Hong Kong Hang Seng Index Markets"

The economic significance of conditional skewness in index option markets

The bias in time series volatility forecasts

General equilibrium and preference free model for pricing options under transformed gamma distribution

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