Microstructure Characteristics of U.S. Futures Markets

Prior finance literature lacks a comprehensive analysis of microstructure characteristics of U.S. futures markets due to the lack of data availability. Utilizing a unique data set for five different futures contract this dissertation fills this gap in the finance literature. In three essays price discovery, resiliency and the components of bid-ask spreads in electronic futures markets are examined. In order to provide comprehensive and robust analysis, both moderately volatile pre-crisis and volatile crisis periods are included in the analysis. The first essay entitled “Price Discovery and Liquidity Characteristics for U.S. Electronic Futures and ETF Markets” explores the price discovery process in U.S. futures and ETF markets. Hasbrouck’s information share method is applied to futures and ETF instruments. The information share results show that futures markets dominate the price discovery process. The results on the factors that affect the price discovery process show that when volatility increases, the price leadership of futures markets declines. Furthermore, when the relative size of bid-ask spread in one market increases, its information share decreases. The second essay, entitled “The Resiliency of Large Trades for U.S. Electronic Futures Markets,“ examines the effects of large trades in futures markets. How quickly prices and liquidity recovers after large trades is an important characteristic of financial markets. The price effects of large trades are greater during the crisis period compared to the pre-crisis period. Furthermore, relative to the pre-crisis period, during the crisis period it takes more trades until liquidity returns to the pre-block trade levels. The third essay, entitled “Components of Quoted Bid-Ask Spreads in U.S. Electronic Futures Markets,” investigates the bid-ask spread components in futures market. The components of bid-ask spreads is one of the most important subjects of microstructure studies. Utilizing Huang and Stoll’s (1997) method the third essay of this dissertation provides the first analysis of the components of quoted bid-ask spreads in U.S. electronic futures markets. The results show that order processing cost is the largest component of bid-ask spreads, followed by inventory holding costs. During the crisis period market makers increase bid-ask spreads due to increasing inventory holding and adverse selection risks.

Three Essays on Market Depth in Futures Markets

Liquidity is an important market characteristic for participants in every financial market. One of the three components of liquidity is market depth. Prior literature lacks a comprehensive analysis of depth in U.S. futures markets due to past limitations on the availability of data. However, recent innovations in data collection and dissemination provide new opportunities to investigate the depth dimension of liquidity. In this dissertation, the Chicago Mercantile Exchange (CME) Group proprietary database on depth is employed to study the dynamics of depth in the U.S. futures markets. This database allows for the analysis of depth along the entire limit order book rather than just at the first level. The first essay examines the characteristics of depth within the context of the five-deep limit order book. Results show that a large amount of depth is present in the book beyond the best level. Furthermore, the findings show that the characteristics of five-deep depth between day and night trading vary and that depth is unequal across levels within the limit order book. The second essay examines the link between the five-deep market depth and the bid-ask spread. The results suggest an inverse relation between the spread and the depth after adjusting for control factors. The third essay explores transitory volatility in relation to depth in the limit order book. Evidence supports the relation between an increase in volatility and a subsequent decrease in market depth. Overall, the results of this dissertation are consistent with limit order traders actively managing depth along the limit order book in electronic U.S. futures markets.

An econometric analysis of ETF and ETF futures in financial and energy markets using generated regressors

It is well known that that there is an intrinsic link between the financial and energy sectors, which can be analyzed through their spillover effects, which are measures of how the shocks to returns in different assets affect each other’s subsequent volatility in both spot and futures markets. Financial derivatives, which are not only highly representative of the underlying indices but can also be traded on both the spot and futures markets, include Exchange Traded Funds (ETFs), which is a tradable spot index whose aim is to replicate the return of an underlying benchmark index. When ETF futures are not available to examine spillover effects, “generated regressors” may be used to construct both Financial ETF futures and Energy ETF futures. The purpose of the paper is to investigate the covolatility spillovers within and across the US energy and financial sectors in both spot and futures markets, by using “generated regressors” and a multivariate conditional volatility model, namely Diagonal BEKK. The daily data used are from 1998/12/23 to 2016/4/22. The data set is analyzed in its entirety, and also subdivided into three subset time periods. The empirical results show there is a significant relationship between the Financial ETF and Energy ETF in the spot and futures markets. Therefore, financial and energy ETFs are suitable for constructing a financial portfolio from an optimal risk management perspective, and also for dynamic hedging purposes.

Open and closed positions and stock index futures volatility

In this paper we analyze the relationship between volatility in index futures markets and the number of open and closed positions. We observe that, although in general both positions are positively correlated with contemporaneous volatility, in the case of S&P 500, only the number of open positions has influence over the volatility. Additionally, we observe a stronger positive relationship on days characterized by extreme movements of these contracting movements dominating the market. Finally, our findings suggest that day-traders are not associated to an increment of volatility, whereas uninformed traders, both opening and closing their positions, have to do with it.

A simplified pricing model for volatility futures

We develop a general model to price VIX futures contracts. The model is adapted to test both the constant elasticity of variance (CEV) and the Cox–Ingersoll–Ross formulations, with and without jumps. Empirical tests on VIX futures prices provide out-of-sample estimates within 2% of the actual futures price for almost all futures maturities. We show that although jumps are present in the data, the models with jumps do not typically outperform the others; in particular, we demonstrate the important benefits of the CEV feature in pricing futures contracts. We conclude by examining errors in the model relative to the VIX characteristics

Booms and busts in commodity markets: bubbles or fundamentals?

This paper considers whether there were periodically collapsing rational speculative bubbles in commodity prices over a 40-year period from the late 1960s. We apply a switching regression approach to a broad range of commodities using two different measures of fundamental values—estimated from convenience yields and from a set of macroeconomic factors believed to affect commodity demand. We find reliable evidence for bubbles only among crude oil and feeder cattle, showing the popular belief that the extreme price movements observed in commodity markets were caused by pure speculation to be unsustainable

The role of index trading in price formation in the grains and oilseeds markets

We use both Granger-causality and instrumental variables (IV) methods to examine the impact of index fund positions on price returns for the main US grains and oilseed futures markets. Our analysis supports earlier conclusions that Granger-causal impacts are generally not discernible. However, market microstructure theory suggests trading impacts should be instantaneous. IV-based tests for contemporaneous causality provide stronger evidence of price impact. We find even stronger evidence that changes in index positions can help predict future changes in aggregate commodity price indices. This result suggests that changes in index investment are in part driven by information which predicts commodity price changes over the coming months.

Do jumps matter for volatility forecasting? Evidence from energy markets

This paper characterizes the dynamics of jumps and analyzes their importance for volatility forecasting. Using high-frequency data on four prominent energy markets, we perform a model-free decomposition of realized variance into its continuous and discontinuous components. We find strong evidence of jumps in energy markets between 2007 and 2012. We then investigate the importance of jumps for volatility forecasting. To this end, we estimate and analyze the predictive ability of several Heterogenous Autoregressive (HAR) models that explicitly capture the dynamics of jumps. Conducting extensive in-sample and out-of-sample analyses, we establish that explicitly modeling jumps does not significantly improve forecast accuracy. Our results are broadly consistent across our four energy markets, forecasting horizons, and loss functions

RP94-217 No. 18 Use of Crop Futures and Options by the Nontrader

Crop producers make a number of decisions that are market related. They may be categorized as financial decisions, production decisions, or marketing decisions. All three decisions depend on what prices are likely to be at some specific time in the future. The marketing decisions is complex. This research publication discusses the number of alternatives that are available even for the producer who does not directly buy or sell futures or options contracts.

Market efficiency of commodity futures in India

This paper aims to examine the market efficiency of the commodity futures market in India, which has been growing phenomenally for the last few years. We estimate the long-run equilibrium relationship between the multi-commodity futures and spot prices and then test for market efficiency in a weak form sense by applying both the DOLS and the FMOLS methods. The entire sample period is from 2 January 2006 to 31 March 2011. The results indicate that a cointegrating relationship is found between these indices and that the commodity futures market seems to be efficient only during the more recent sub-sample period since July 2009.

Separation and hedging results with state-contingent production

A state-contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty. Producer behaviour with both production and price risk, in the presence and in the absence of futures and forward markets, is analysed in this state-contingent framework. Conditions for the optimal hedge to be positive or negative are derived. We also show that, under plausible conditions, a risk-averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a nonstochastic technology. New separation results, which hold in the presence of both price and production risk, are then developed. These separation results generalize Townsend's spanning results by reducing the number of necessary forward markets by one.

Simulação interactiva do mercado de energia eléctrica

A área de comercialização de energia eléctrica conheceu uma profunda mudança após a liberalização do sector eléctrico, que levou à criação de algumas entidades, as quais gerem os mercados de electricidade europeus. Relativamente a Portugal e Espanha, durante esse processo de liberalização, deu-se também um acordo que os levou à criação de um mercado conjunto, um mercado Ibérico (MIBEL). Dentro deste mercado estão contemplados dois operadores, sendo que um deles representa o pólo Português (OMIP) e o outro representa o pólo Espanhol (OMEL). O OMIP contempla os mercados a prazo, ou futuros, normalmente apresenta contratos de energia comercializada com durabilidade de semanas, meses, trimestres, semestres ou mesmo anos. Diariamente estes contratos poderão vencer no OMEL, que engloba os mercados, diário e intradiário. Este, ao contrário do OMIP negoceia para o dia seguinte (mercado diário) ou para uma determinada altura do dia (mercado intra diário). O mercado diário será o exemplo usado para a criação do simulador interactivo do mercado de energia eléctrica. Este será composto por diversos utilizadores (jogadores), que através de uma plataforma HTML irão investir em centrais de energia eléctrica, negociar licitações e analisar o funcionamento e resultados deste mercado. Este jogo subdividir-se-á então em 3 fases: 1. Fase de investimento; 2. Fase de venda (licitações); 3. Fase de mercado. Na fase do investimento, o jogador terá a possibilidade de adquirir unidades de geração de energia eléctrica de seis tipos de tecnologia: 1. Central a Carvão; 2. Central de Ciclo Combinado; 3. Central Hídrica; 4. Central Eólica; 5. Central Solar; 6. Central Nuclear. Com o decorrer das jogadas o jogador poderá aumentar a sua capacidade de investimento, com a venda de energia, sendo o vencedor aquele que mais saldo tiver no fim do número de jogadas previamente definidos, ou aquele que mais depressa atingir o saldo definido como limite pelo administrador do jogo. A nível pedagógico este simulador é muito interessante pois para além de o utilizador ficar a conhecer as tecnologias em causa e as vantagens e desvantagens das centrais de energia renovável e das centrais a combustíveis fósseis, este ganha igualmente uma sensibilidade para questões de nível ambiental, tais como o aumento dos gases de estufa e o degelo resultante do aquecimento global provocado por esses gases. Para além do conhecimento adquirido na parte de energia eléctrica este jogo dará a conhecer ao utilizador o funcionamento do mercado da energia eléctrica, bem como as tácticas que este poderá usar a seu favor neste tipo de mercado.

Contratos de Futuros sobre Taxas de Juro

Mestrado em Contabilidade Internacional