Simultaneous volatility transmissions and spillover effects: U.S. and Hong Kong stock and futures markets

Contemporaneous transmission effects across volatilities of the Hong Kong Stock and Index futures markets and futures volume of trade are tested by employing a structural systems approach. Competing measures of volatility spillover, constructed from the overnight U.S. S&P500 index futures, are tested and found to impact on the Hong Kong asset return volatility and volume of trade patterns. The examples utilize intra-day 15-min sampled data from this medium-sized Asia Pacific equity and derivative exchange. Both the intra- and inter-day patterns in the Hong Kong market are allowed for in the estimation process.

Modelling linkages between Australian financial futures markets

This paper investigates the dynamic interdependence of the Australian financial futures markets. A multivariate EGARCH model is developed to investigate linkages and stochastic volatility interactions between the 10-year Treasury bond, 90-day bank-accepted bill, and the All Ordinaries share price index futures markets. In this analysis, the empirical results strongly suggest that significant volatility interactions are evident across the 3 markets.

The Samuelson hypothesis in futures markets : an analysis using intraday data

This paper considers the Samuelson hypothesis, which argues that the futures price volatility increases as the futures contract approaches its expiration. Utilizing intraday data from 20 futures markets in six futures exchanges, we find strong support for the Samuelson hypothesis in agricultural futures. However, the Samuelson hypothesis does not hold for other futures contracts. We also provide supporting evidence that the ‘negative covariance’ hypothesis is the key factor for the empirical support of the Samuelson hypothesis. In addition, our findings remain largely unaltered even after we control for seasonality and liquidity effects.

Realized volatility and correlation in grain futures markets: testing for spillover effects

Fluctuations in commodity prices are a major concern to many market participants. This paper uses realized volatility methods to calculate daily volatility and correlation estimates for three grain futures prices (corn, soybean, and wheat). The realized volatility estimates exhibit properties consistent with the stylized facts observed in earlier studies. According to daily realized correlations and regression coefficients, the spot returns from the three grain futures are positively related. The realized estimates are then used to evaluate the degree of volatility transmission across grain futures prices. The impulse response analysis is conducted by fitting the vector autoregressive model to realized volatility and correlation estimates, using the bootstrap method for statistical inference. The results indicate that rich dynamic interactions exist among the volatilities and correlations across the grain futures markets.

The trading dynamics of close-substitute futures markets : evidence of margin policy spillover effects

Volatility spillover is well documented among closely related securities. I investigate the relationship between margin policy and trading dynamics of the Nikkei 225 index futures markets of Osaka Securities Exchange (OSE) and Singapore Exchange (SGX). I find that OSE’s margin policy influences trading dynamics across both markets, although it is the less liquid SGX market that performs price discovery. This suggests that policy markers of close substitute markets should coordinate, or at least communicate policy intentions due to policy spillover. SGX’s market design facilitates price discovery, suggesting that a microstructure framework capable of overcoming the liquidity entry barrier is of interest to any futures exchange contemplating contract proliferation.

Contemporaneous intra-day volume, option, and futures volatility transmissions across parallel markets

The primary objective of this article is to investigate volatility transmission across three parallel markets operating on the Sydney Futures Exchange (SFE), both within and out of sample. Half-hourly observations are sampled from transaction data for the share price index (SPI) futures, SPI futures options, and 90-day bank accepted bill (BAB) futures markets, and the analysis is carried out using the simultaneous volatility (SVL) system of equations as well as competing volatility models. The results confirm the poor ability of GARCH models to fit intraday data. This study also applies an artificial nesting procedure to evaluate the out-of-sample volatility forecasts. Implied volatility has very limited (if any) predictive power when evaluated in isolation, whereas the SVL model with implied volatility embedded provides incremental information relative to competing model forecasts.

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.

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.