Time-varying hedge ratios: an application to the Indian stock futures market

This paper investigates time-varying optimal hedge ratios in individual stock futures markets in India. The analysis employs data on individual stock futures from an unexplored but highly traded (both in terms of volume and quantity) emerging market. The hedge ratios derived in this study incorporate mean reversion in volatility, which is an important extension of the bivariate BEKK-GARCH model of Engle and Kroner. This extension generates improved optimal hedge ratios over the traditional BEKK-GARCH model and static error correction type alternatives.

Time varying hedge ratios : an application to the Indian stock futures market

This paper investigates time-varying optimal hedge ratios in individual stock futures markets in India. The analysis employs data on individual stock futures from an unexplored but highly traded (both in terms of volume and quantity) emerging market. The hedge ratios derived in this study incorporate mean reversion in volatility, which is an important extension of the bivariate BEKK-GARCH model of Engle and Kroner. This extension generates improved optimal hedge ratios over the traditional BEKK-GARCH model and static error correction type alternatives.

Intraday periodicity and long memory volatility processes in the Korean bond futures market

This article examines long memory volatility processes in the 5 minute Korean Treasury bond futures data using two different techniques: the GPH test and the EML test. Two proxies of volatility returns are used: absolute returns and square returns. We found intraday periodicity and autocorrelation persistence in the volatility for the 5 minute returns. The empirical results from both techniques indicate that there is little evidence of long memory in the level of returns, but there is significant evidence of long memory in the absolute returns and the square returns. This implies that volatility is best characterised by long memory processes. Additionally, we found that the absolute returns are the most appropriate indicator to represent the long memory volatility processes.

Efficiency and unbiasedness in the Indian stock index futures market

This paper explores potential efficiency and unbiasedness as well as the degree of efficiency in stock index futures of an emerging market using both monthly and daily data. Besides analyzing efficiency and unbiasedness with cointegration and error correction model, the degree of efficiency is further investigated after explicitly modeling the underlying state of the market (expansion or contraction) through the first-order Markov switching set-up. The results show that a relatively longer two-month horizon is more effective in eliminating arbitrage opportunities than the short run (one-month and daily) futures.

A factor analytical approach to the efficient futures market hypothesis

Most empirical evidence suggests that the efficient futures market hypothesis, henceforth referred to as EFMH, stating that spot and futures prices should cointegrate with a unit slope on futures prices, does not hold, a finding at odds with many theoretical models. This article argues that these results can be attributed in part to the low power of univariate tests, and that the use of panel data can generate more powerful tests. The current article can be seen as a step in this direction. In particular, a newly developed factor analytical approach is employed, which is very general and, in addition, free of the otherwise so common incidental parameters bias in the presence of fixed effects. The approach is applied to a large panel covering 17 commodities between March 1991 and August 2012. The evidence suggests that the EFMH cannot be rejected once the panel evidence has been taken into account. © 2014 Wiley Periodicals, Inc.

Estimating Forward Pricing Function: How Efficient is Indian Stock Index Futures Market?

This paper uses Indian stock futures data to explore unbiased expectations and efficient market hypothesis. Having experienced voluminous transactions within a short time span after its establishment, the Indian stock futures market provides an unparalleled case for exploring these issues involving expectation and efficiency. Besides analyzing market efficiency between cash and futures prices using cointegration and error correction frameworks, the efficiency hypothesis is also investigated after explicitly modeling the underlying state of the market (expansion or contraction) through the first-order Markov switching set-up. The results based on Markov switching analysis show that relatively longer time horizon is more effective in eliminating arbitrage opportunities than the short run.

On the extent of speculative activity in the Indian stock market during badla and post-badla period

The authors test the existence of speculative activity in the Indian stock market during badla and post-badla period. They further investigate whether speculative activity migrated to single stocks futures market after banning of badla system. In both the tests it is found that there is no evidence of strong speculative activity in the Indian market. The research raises some questions on the regulators decision of banning badla system and sheds some light on the future decisions with respect to single stock futures market.

"Information effect" of economic news: SPI futures

The present study investigates the behaviour of Share Price Index (SPI) futures returns, volatility, and trading volume behaviour around the announcement of Current Account Deficit (CAD), Gross Domestic Product (GDP), and Inflation (CPI). The futures market data are sampled at 1-, 5-, and 10-min intervals at the announcement time. After controlling for risk, a significant positive abnormal return can be earned based on the good news release. However, it is unlikely that traders could make an economic profit by exploiting this effect. In this sense, this futures market returns are found to react efficiently to good news. Volatility behaviour around announcements provides the same conclusion. As for the relationship between returns, volatility, and volume upon information arrival, returns are positively related to trading volume, which is inconsistent with the ‘short sales constraint’ theory. Trading volume is found to increase as the level of volatility rises. The redenomination of the SPI futures and options contract from A$100 to A$25 per basis point is found to increase trading volume in excess of that expected due to the redenomination. However, market return and volatility are unaffected by the redenomination.

Economic linkages across commodity futures : hedging and trading implications

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.

Introduction of electronic trading in index futures : volatility and volume effects

There is continuing debate in the US over full introduction of electronic trading in those index futures contracts that are still traded at the CME via open outcry. Since the late 1990s major international exchanges trading index futures contracts have converted to full electronic trading. Recent empirical studies have focused on effects on bid/ask spreads and related price volatility following these changes. We take a different approach and investigate and test for structural change in conditional volatility and volume effects following the shift to electronic trading in the Australian Share Price Index futures contract. Multiple Switching point GARCH models are employed with the data sampled at 5, 15 and 30-minute intervals from transaction records supplied by the Sydney Futures Exchange. There is significant evidence of structural changes in both the persistence of volatility shocks and simultaneous volume effects following the change to screen trading in this futures market.