Return and Volatility performance comparison of Ethical and Non-ethical publicly-listed financial services companies

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Using scenarios to explore UK upland futures

Uplands around the world are facing significant social, economic and environmental changes, and decision-makers need to better understand what the future may hold if they are to adapt and maintain upland goods and services. This paper draws together all major research comprising eight studies that have used scenarios to describe possible futures for UK uplands. The paper evaluates which scenarios are perceived by stakeholders to be most likely and desirable, and assesses the benefits and drawbacks of the scenario methods used in UK uplands to date. Stakeholders agreed that the most desirable and likely scenario would be a continuation of hill farming (albeit at reduced levels) based on cross-compliance with environmental measures. The least desirable scenario is a withdrawal of government financial support for hill farming. Although this was deemed by stakeholders to be the least likely scenario, the loss of government support warrants close attention due to its potential implications for the local economy. Stakeholders noted that the environmental implications of this scenario are much less clear-cut. As such, there is an urgent need to understand the full implications of this scenario, so that upland stakeholders can adequately prepare, and policy-makers can better evaluate the likely implications of different policy options. The paper concludes that in future, upland scenario research needs to: (1) better integrate in-depth and representative participation from stakeholders during both scenario development and evaluation; and (2) make more effective use of visualisation techniques and simulation models. (C) 2009 Elsevier Ltd. All rights reserved.

Can we explain the dynamics of the UK FTSE 100 stock and stock index futures markets?

If stock and stock index futures markets are functioning properly price movements in these markets should best be described by a first order vector error correction model with the error correction term being the price differential between the two markets (the basis). Recent evidence suggests that there are more dynamics present than should be in effectively functioning markets. Using self-exciting threshold autoregressive (SETAR) models, this study analyses whether such dynamics can be related to different regimes within which the basis can fluctuate in a predictable manner without triggering arbitrage. These findings reveal that the basis shows strong evidence of autoregressive behaviour when its value is between the two thresholds but that the extra dynamics disappear once the basis moves above the upper threshold and their persistence is reduced, although not eradicated, once the basis moves below the lower threshold. This suggests that once nonlinearity associated with transactions costs is accounted for, stock and stock index futures markets function more effectively than is suggested by linear models of the pricing relationship.

Evaluating interval forecasts of high-frequency financial data

A number of methods of evaluating the validity of interval forecasts of financial data are analysed, and illustrated using intraday FTSE100 index futures returns. Some existing interval forecast evaluation techniques, such as the Markov chain approach of Christoffersen (1998), are shown to be inappropriate in the presence of periodic heteroscedasticity. Instead, we consider a regression-based test, and a modified version of Christoffersen's Markov chain test for independence, and analyse their properties when the financial time series exhibit periodic volatility. These approaches lead to different conclusions when interval forecasts of FTSE100 index futures returns generated by various GARCH(1,1) and periodic GARCH(1,1) models are evaluated.

An alternative approach to investigating lead-lag relationships between stock and stock index futures markets

In the absence of market frictions, the cost-of-carry model of stock index futures pricing predicts that returns on the underlying stock index and the associated stock index futures contract will be perfectly contemporaneously correlated. Evidence suggests, however, that this prediction is violated with clear evidence that the stock index futures market leads the stock market. It is argued that traditional tests, which assume that the underlying data generating process is constant, might be prone to overstate the lead-lag relationship. Using a new test for lead-lag relationships based on cross correlations and cross bicorrelations it is found that, contrary to results from using the traditional methodology, periods where the futures market leads the cash market are few and far between and when any lead-lag relationship is detected, it does not last long. Overall, the results are consistent with the prediction of the standard cost-of-carry model and market efficiency.

Do long-short speculators destabilize commodity futures markets?

This paper contributes to the debate on the effects of the financialization of commodity futures markets by studying the conditional volatility of long–short commodity portfolios and their conditional correlations with traditional assets (stocks and bonds). Using several groups of trading strategies that hedge fund managers are known to implement, we show that long–short speculators do not cause changes in the volatilities of the portfolios they hold or changes in the conditional correlations between these portfolios and traditional assets. Thus calls for increased regulation of commodity money managers are, at this stage, premature. Additionally, long–short speculators can take comfort in knowing that their trades do not alter the risk and diversification properties of their portfolios.

Forecasting daily volatility using high frequency financial data

Aiming at empirical findings, this work focuses on applying the HEAVY model for daily volatility with financial data from the Brazilian market. Quite similar to GARCH, this model seeks to harness high frequency data in order to achieve its objectives. Four variations of it were then implemented and their fit compared to GARCH equivalents, using metrics present in the literature. Results suggest that, in such a market, HEAVY does seem to specify daily volatility better, but not necessarily produces better predictions for it, what is, normally, the ultimate goal. The dataset used in this work consists of intraday trades of U.S. Dollar and Ibovespa future contracts from BM&FBovespa.

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.

Analysis of the traded volume drivers of the Iberian power futures market

A comprehensive assessment of the liquidity development in the Iberian power futures market managed by OMIP (“Operador do Mercado Ibérico de Energia, Pólo Português”) in its first 4 years of existence is performed. This market started on July 2006. A regression model tracking the evolution of the traded volumes in the continuous market is built as a function of 12 potential liquidity drivers. The only significant drivers are the traded volumes in OMIP compulsory auctions, the traded volumes in the “Over The Counter” (OTC) market, and the OTC cleared volumes in OMIP clearing house (OMIClear). Furthermore, the enrollment of financial members shows strong correlation with the traded volumes in the continuous market. OMIP liquidity is still far from the levels reached by the most mature European markets (Nord Pool and EEX). The market operator and its clearing house could develop efficient marketing actions to attract new entrants active in the spot market (energy intensive industries, suppliers, and small producers) as well as volumes from the opaque OTC market, and to improve the performance of existing illiquid products. An active dialogue with all the stakeholders (market participants, spot market operator, and supervisory authorities) will help to implement such actions.

Modelling and testing volatility spillovers in oil and financial markets for USA, UK and China

The primary purpose of the paper is to analyze the conditional correlations, conditional covariances, and co-volatility spillovers between international crude oil and associated financial markets. The paper investigates co-volatility spillovers (namely, the delayed effect of a returns shock in one physical or financial asset on the subsequent volatility or co-volatility in another physical or financial asset) between the oil and financial markets. The oil industry has four major regions, namely North Sea, USA, Middle East, and South-East Asia. Associated with these regions are two major financial centers, namely UK and USA. For these reasons, the data to be used are the returns on alternative crude oil markets, returns on crude oil derivatives, specifically futures, and stock index returns in UK and USA. The paper will also analyze the Chinese financial markets, where the data are more recent. The empirical analysis will be based on the diagonal BEKK model, from which the conditional covariances will be used for testing co-volatility spillovers, and policy recommendations. Based on these results, dynamic hedging strategies will be suggested to analyze market fluctuations in crude oil prices and associated financial markets.

Testing co-volatility spillovers for natural gas spot, futures and ETF spot using dynamic conditional covariances

There is substantial empirical evidence that energy and financial markets are closely connected. As one of the most widely-used energy resources worldwide, natural gas has a large daily trading volume. In order to hedge the risk of natural gas spot markets, a large number of hedging strategies can be used, especially with the rapid development of natural gas derivatives markets. These hedging instruments include natural gas futures and options, as well as Exchange Traded Fund (ETF) prices that are related to natural gas stock prices. The volatility spillover effect is the delayed effect of a returns shock in one physical, biological or financial asset on the subsequent volatility or co-volatility of another physical, biological or financial asset. Investigating volatility spillovers within and across energy and financial markets is a crucial aspect of constructing optimal dynamic hedging strategies. The paper tests and calculates spillover effects among natural gas spot, futures and ETF markets using the multivariate conditional volatility diagonal BEKK model. The data used include natural gas spot and futures returns data from two major international natural gas derivatives markets, namely NYMEX (USA) and ICE (UK), as well as ETF data of natural gas companies from the stock markets in the USA and UK. The empirical results show that there are significant spillover effects in natural gas spot, futures and ETF markets for both USA and UK. Such a result suggests that both natural gas futures and ETF products within and beyond the country might be considered when constructing optimal dynamic hedging strategies for natural gas spot prices.

Financial markets--preliminary observations on the October 1987 crash : report to congressional requesters /

"GAO/GGD-88-38."

The propensity to hedge with futures contracts:the case of potato futures contracts

This paper studies why UK non-financial firms hedge with potato futures contracts. It is found that the financial characteristics of firms in the sample play an important role in influencing the propensity to hedge. For example, it is found that firms that hedge are on average larger than firms that do not hedge. Firms that hedge also have more volatile earnings. Furthermore, firms that do hedge appear to want to smooth earnings to reduce the costs of financial distress and avoid entering the highest tax threshold. © 2005 Taylor & Francis.

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.