Search

The systemic stability of a stock market is one of the core issues in the financial field. The market can be regarded as a complex network whose nodes are stocks connected by edges that signify their correlation strength. Since the market is a strongly nonlinear system, it is difficult to measure the macroscopic stability and depict market fluctuations in time. In this article, we use a geometric measure derived from discrete Ricci curvature to capture the higher-order nonlinear architecture of financial networks. In order to confirm the effectiveness of our method, we use it to analyze the CSI 300 constituents of China's stock market from 2005 to 2020 and the systemic stability of the market is quantified through the network's Ricci-type curvatures. Furthermore, we use a hybrid model to analyze the curvature time series and predict the future trends of the market accurately. As far as we know, this is the first article to apply Ricci curvature to forecast the systemic stability of China's stock market, and our results show that Ricci curvature has good explanatory power for the market stability and can be a good indicator to judge the future risk and volatility of China's stock market. [ABSTRACT FROM AUTHOR]

There have been heated debates about the role of stock index futures in the financial market, especially during the crash periods. In this paper, a multiagent spot-futures market model is developed to analyze the micromechanism of shock transfer across spot and futures markets. We assume that there are two stocks and one stock index futures contract in the spot-futures market. Agents are heterogeneous, including fundamentalists, chartists, noise traders, and arbitragers. The spot market and the futures market are linked by arbitragers. The simulation results show that our spot-futures market model can reproduce various important stylized facts, including the price co-movement between stock index prices and index futures prices and the fat-tailed distribution of the returns of risky assets and the basis. Further analysis shows that when we introduce an exogenous fundamental shock to one of the stocks, the backwardation phenomenon appears in the futures market and the shock is widespread across the whole market by means of index futures. Moreover, the backwardation gradually disappears when the number of arbitragers increases. Besides, when there are few arbitragers or when there are sufficient arbitragers, shocks cannot be transferred to other stocks via the futures market, while an intermediate level of arbitrage will amplify the shock transfer and hurt market stability. These findings underscore that arbitragers play an important role in spot-futures market interaction and shock transfer, and adequate arbitrage trading during crises may help eliminate the positive basis and halt the further spread of the crises. [ABSTRACT FROM AUTHOR]

Motivated by the growing interest of investors in commodities and by advances in risk measurement, we present a full‐scale analysis of expected shortfall (ES) in commodity futures markets. Besides illustrating the dynamics of historic ES, we evaluate whether popular estimators are suitable for forecasting future ES. By implementing a new backtest, we find that the performance of estimators hinges on market stability. Estimators tend to fail when markets are in turmoil and accurate forecasts are urgently needed. Even though a kernel method performs best on average, our results advise against the use of established estimators for risk (and margin) prediction. [ABSTRACT FROM AUTHOR]

This study investigates the time‐varying connectedness between subsectoral clean‐energy stocks and fossil fuel energy commodities (crude oil, natural gas, and coal) over the period of December 2013–January 2023 employing the Diebold and Yilmaz approach and the dynamic conditional correlation generalized autoregressive conditional heteroscedasticity model. According to the findings, oil transmits the highest volatility spillover shocks to biofuels, and the least to the fuel cell industry. Both natural gas and coal transmit the highest volatility spillover shocks to energy storage, and the least to geothermal and green information technology, respectively. The study also finds strong and time‐varying volatility connectedness among clean‐energy assets and fossil fuels, significantly affected by global extreme events, such as the COVID‐19 pandemic and the Russia–Ukraine conflict. Additionally, the study provides time‐varying and mean optimal hedge ratios with optimal portfolio weights for investors. The empirical results are robust, and important portfolio and policy implications based on empirical findings are provided. [ABSTRACT FROM AUTHOR]

Equity index futures are often blamed for exacerbating equity price crash risk although there is little empirical evidence to support the accusation in the literature. We find that Chinese equity index futures trading significantly reduces stock price crash risk. This negative relationship is strengthened by institutional ownership and weakened by a controlling shareholders' incentive to elude external monitoring, such as the divergence of control and cash‐flow rights of dominant shareholders, the block holdings of the largest shareholders, and state ownership. Our findings reveal the positive externality of financial derivative innovation on equity market stability. [ABSTRACT FROM AUTHOR]

This study analyzes market index futures data on the Taiwan Futures Exchange to explore herd trading behaviors and their impact on the market. The study finds that herd behaviors are prevalent in all trading directions and that investor sentiment is a more direct explanation than information chasing. Herding in intraday trading increases market volatility on the same day but decreases it on the following day. Additional tests show that overnight trading has a weaker herding tendency and a less noticeable market correction on the following day, which can be attributed in part to the lower participation of retail traders in overnight sessions. The analysis using overnight trading reinforces the relevance of retail trading in explaining herd trading. Overall, the study offers new evidence and insights into herd behaviors in the derivatives market dominated by retail investors. [ABSTRACT FROM AUTHOR]

Using a proposed quantile‐based hedging analysis framework, this paper analyzes the hedging properties and portfolio performance of 15 commodities futures in China, especially under extreme market conditions. Quantile‐on‐quantile regression results show that the dependency structures of most spot and futures prices exhibit an almost similar shape with positive coefficients, which indicates that most futures products are good hedges and safe havens for the corresponding spot prices. Quantile hedge ratios vary with the quantiles, displaying a U‐shape, so the hedge ratios of most commodities should increase moderately in both bearish and bullish markets. As for portfolio performance, metal commodities perform best; agricultural commodities second best, and energy commodities relatively poorly. Out‐of‐sample quantile hedging results are consistent with in‐sample results. Therefore, participating in the futures market can effectively manage risk. The premise is that investors pay attention to market dynamics and adjust their portfolios promptly. [ABSTRACT FROM AUTHOR]

This study examines the effects of different algorithmic traders on market quality and the price discovery process, considering the impact of different trading strategies and market conditions. Algorithmic foreign institutions and proprietary firms act strategically, by monitoring market conditions. During stable market conditions, they supply liquidity, and this strategic activity both improves price efficiency and increases fundamental volatility. In more turbulent market conditions, algorithmic foreign institutions and proprietary firms instead demand liquidity, and their trading activity leads to an increase in price efficiency and a decrease in excessive volatility. Overall, algorithmic trades do not harm market quality. [ABSTRACT FROM AUTHOR]

In the past few years, the lean hog and live cattle futures markets have experienced significantly heightened volatility and frequent limit moves. In this paper, we study whether price limits help resolve uncertainty and facilitate liquidity provision in the two markets and how they affect trading in the limit‐free options market. In contrast to previous literature that is based on daily data, we use intraday futures and options data from 2014 to 2019 that allows for a better characterization of market behavior around limit moves. Consistent with microstructure theories, we find that price limits neither reduce volatility nor improve liquidity. Instead, they add to the high uncertainty that precedes the limit move, leading to significantly higher volatility and lower liquidity when trading resumes. Further, contrary to the notion that trading migrates to the limit‐free options market, options volume drops and liquidity drains during limit moves. The options‐implied futures price is only a biased, inefficient, and highly noisy estimate of the equilibrium futures price on locked‐limit days. Overall, the findings suggest that rather than allowing the markets to cool off, price limits adversely affect market quality in presence of large price movements. [ABSTRACT FROM AUTHOR]

The European Union's pioneering carbon Emissions Trading System, the EU ETS, has inspired countries around the world to launch their own CO2 markets. This paper analyses the evolution of the EU ETS from a political economy perspective, emphasizing the interaction of economic principles and political interests at pivotal moments, and showing how each compromise changed the scope for future design choices. We focus on the allowance allocation issue, which provides a window into the complex tug‐of‐war between economic efficiency and the politics of distribution. Our account highlights the dynamic nature of CO2 market reform, and provides lessons that can help inform the design of more stable and effective CO2 markets in the future. This article is categorized under:Climate Economics > Economics of MitigationThe Carbon Economy and Climate Mitigation > Policies, Instruments, Lifestyles, Behavior [ABSTRACT FROM AUTHOR]

The Bitcoin futures market has grown rapidly since its 2017 introduction. Along with enabling institutional traders to access a regulated cryptocurrency product, futures provide a means to improve market efficiency by shorting Bitcoin. We examine trading behavior in Bitcoin futures utilizing the Commodity Futures Trading Commission Commitment of Traders report. Leveraged money traders tend to hold the largest positions, be net short, and their trading behavior plays a key role in the Bitcoin futures market. Our empirical results show that leveraged money traders display market timing ability, largely by adjusting their short positions. It seems that other trader types follow this "smart money" in adjusting their own positions in subsequent periods. We also demonstrate that it is possible to construct profitable trading strategies based on observed variations in leveraged money positions. [ABSTRACT FROM AUTHOR]

The Commodity Futures Trading Commission (CFTC) recently identified large intra‐day price changes or "flash events" in continuously traded commodity futures markets. These flash events fueled discussion on whether futures markets are becoming less effective as human intervention is diminishing in favor of automated trading. Using intra‐day data, we examine liquidity resilience during "flash events" in corn and lean hog futures markets from 2014 to 2019. Overall, we find little evidence that the liquidity provision in these two markets relative to normal days becomes fragile when large price movements occur. Our analysis suggests that flash events are heavily influenced by unanticipated changes in fundamentals that may lead to a new equilibrium price. Liquidity dynamics during these events supports the view that active market making helps absorb the increased volume and stabilize markets. [ABSTRACT FROM AUTHOR]

To study the market quality of commodity futures markets, we construct a commodity futures market quality index from the perspective of liquidity, efficiency, and volatility. Based on the market quality index, the Chinese commodity futures market operates steadily. The metal futures market is more efficient and stable than the market for agricultural futures. The Chinese commodity futures market is less liquid and more volatile than the U.S. market. We examine the determinants of market quality and find that macroeconomic variables and futures market contracts are significantly related to the market quality of Chinese commodity futures. [ABSTRACT FROM AUTHOR]

In April 2017, China Financial Futures Exchange adjusted the maximum order volume of single trading in stock index futures, and this paper conducts research on this event. Firstly, it analyzes the influence of the adjustment of maximum order volume on the characteristics of the limit order book with high-frequency data and the impact of ordering situation on the trading depth and volatility of each contract with panel data. Secondly, it takes high-frequency tick-by-tick data to explore the causal relationship between the ordering situation and the probability of informed trading and analyzes the impact of the event on the probability of informed trading. Finally, the dynamic factor analysis method is used to quantify the pricing efficiency based on the probability of informed trading and the characteristics of limit order book, and the influence of the event on the pricing efficiency of stock index futures market is discussed. The results show that the reduction of maximum order volume has different effects on dominant contracts and nondominant contracts of stock index futures. After the event, the overall trading volume of the market increased, where the trading volume of dominant contracts decreased and that of nondominant contracts increased. For dominant contracts, the depth, slope, and liquidity decrease, the spread increases, and the probability of informed trading decreases so that the pricing efficiency becomes worse, while the results of nondominant contracts are the opposite. For Chinese stock index futures market, the pricing efficiency is greatly reduced and the resource allocation capacity is weakened under the influence of the event. Therefore, the adjustment of maximum order volume is not conducive to the healthy development of the stock index futures market. It is suggested that the reduction of the maximum order volume is only implemented for nondominant contracts. [ABSTRACT FROM AUTHOR]

We investigate the behavior of commodity futures risk premia in China. In the presence of retail‐dominance and barriers‐to‐entry, the term structure and momentum premia remain persistent, whereas hedging pressure, skewness, volatility, and liquidity premia are distorted by time‐varying margins and strict position limits. Furthermore, open interest, currency, and inflation premia are sensitive to institutional settings. The observed premia cannot be attributed to common risks, sentiment, transactions costs, or data‐snooping, but are related to liquidity, anchoring, and regulation‐induced limits‐to‐arbitrage. We highlight the distinctive features of Chinese futures markets and assess the challenges posed to theories of commodity risk premia. [ABSTRACT FROM AUTHOR]

Futures markets for agricultural commodities have existed for well over 100 years. Recently there has been a major expansion of futures trading into nontraditional areas, particularly interest-bearing securities and foreign currencies-the so-called “financial futures.” The introduction of exchange traded futures contracts for Treasury Bills, GNMA pass-through certificates, and other securities has created new hedging, arbitrage, and speculative opportunities for the investors, issuers, and dealers who are active in the cash markets for these securities. Futures trading has also opened these markets to participation by new classes of traders, particularly private and smaller institutional investors. Through the process of arbitrage, a financial futures market will be closely linked to the cash market for the underlying securities. Ah important concern of the regulatory authorities is what effect opening a futures market is likely to have on an existing cash market. The purpose of this paper is to analyze the impact of futures trading in Government National Mortgage Association (GNMA) pass-through certificates on price volatility in the cash market for these securities. [ABSTRACT FROM AUTHOR]

This paper examines the impact of foreign participation in Korean Treasury Bond (KTB) futures and its role in price discovery, using daily transactions data from the over-the-counter market and from the Korea Exchange for the futures. Our analysis suggests that foreign trading in the KTB futures market leads the price discovery process for the underlying bonds. Empirical results show that foreigners' daily net long positions in the futures market exert significant influence in KTB and KTB futures prices. We also find that it is the unexpected component of foreign investors' net long futures positions that explains a significant share of the pricing effects. Our empirical results also suggest that information transmission between cash and futures markets has improved significantly in the crisis and post-crisis period while local market participants have become better in extracting information content from market transactions. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:23-51, 2017 [ABSTRACT FROM AUTHOR]

This study considers calibration to forward-looking betas by extracting information on equity and index options from prices using Lévy models. The resulting calibrated betas are called Lévy betas. The objective of the proposed approach is to capture market expectations for future betas through option prices, as betas estimated from historical data may fail to reflect structural change in the market. By assuming a continuous-time capital asset pricing model (CAPM) with Lévy processes, we derive an analytical solution to index and stock options, thus permitting the betas to be implied from observed option prices. One application of Lévy betas is to construct a static hedging strategy using index futures. Employing Hong Kong equity and index option data from September 16, 2008 to October 15, 2009, we show empirically that the Lévy betas during the sub-prime mortgage crisis period were much more volatile than those during the recovery period. We also find evidence to suggest that the Lévy betas improve static hedging performance relative to historical betas and the forward-looking betas implied by a stochastic volatility model. [ABSTRACT FROM AUTHOR]

We analyze the hedging effectiveness of positions that replicate stock indexes using corresponding futures contracts through the application of a dynamic, stochastic hedging strategy proposed by Lafuente, J. A. and Novales, A. (2003). Conclusive gains do not emerge in any of the markets analyzed over the period considered, relative to the use of a constant unit hedge ratio. These findings are consistent with the trend observed in the IBEX 35 futures market study of Lafuente, J. A. and Novales, A. (2003). Our empirical evidence suggests that, contrary to what happens in less liquid markets, the discrepancy between theoretical and quoted prices in index futures contracts in fully developed markets does not represent a noise factor that can be successfully exploited for hedging. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 29:1050–1066, 2009 [ABSTRACT FROM AUTHOR]

This paper analyzes 31 months of data on 137 single-stock futures (SSFs) traded on OneChicago. The results indicate that on the days they trade, SSFs contribute approximately 24% of the price discovery for underlying stocks. Information revelation in the SSFs market decreases with the ratio of spreads in the futures and the stock markets and the volatility in the stock market. Moreover, the quality of the market for the underlying stocks improves substantially after the introduction of the SSFs market, with the largest improvement occurring on days with SSFs trading. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:335– 353, 2008 [ABSTRACT FROM AUTHOR]

Using futures traded on the Chicago Board of Trade, Chicago Mercantile Exchange and New York Board of Trade, we test six alternative models of the return-generating process (RGP) in futures exchanges that adopt a price-limit regime. We rank the six models according to their return-prediction ability, based on the mean square error criterion, and we find that the near-limit model performed best for both the estimation period and the prediction period. A reliable prediction of the expected return can have important implications for both traders and policy makers, concerning related issues such as the employment of long or short strategy, margin requirements and the effectiveness of the price limit mechanism. [ABSTRACT FROM AUTHOR]

Examines the influence of government regulation on the efficient operation of futures markets in the United States. Relationship between futures markets and financial markets and institutions; Changes in the nature of traded stock index futures; Discussion on the federal fixing of margins on futures contracts.

Examines the role of future markets on intertemporal efficiency in prices and markets. Relationship between resource prices and rates of return; Prediction on the function of resources markets; Significance of pricing to policy makers for future contracts.