Journal of Futures Markets

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  • Price discovery dynamics in European agricultural markets

    This article examines the influence of European agricultural futures contracts on price discovery during periods of price turmoil and rising trading activity. We use a hand‐collected data set of spot and futures prices for canola, wheat, and corn and show that the impact of the futures markets was high during the first period of price spikes (2007 to 2009) but lower during the second one (2010 to 2013). These results are noteworthy as more trading activity in futures markets did not lead to a higher influence on spot prices.

  • On full calibration of hybrid local volatility and regime‐switching models

    Calibrating local regime‐switching models is a challenging problem, especially when the volatility functions are assumed to depend on both of the underlying price and time. In this paper, the inverse problem of determining local volatility functions is firstly established and then solved through the Tikhonov regularization to obtain the optimal solution, which is achieved iteratively through a newly designed numerical algorithm. While our numerical tests with artificial data show that our algorithm can provide quite accurate and stable results, its performance with the involvement of real market data have been further demonstrated using options written on the S&P 500 index.

  • Determinants of intraday price discovery in VIX exchange traded notes

    This study investigates the intraday price discovery of the VIX short‐term futures ETN (VXX) and inverse VIX short‐term ETN (XIV) for the period January 3, 2012 to December 31, 2015. Using Hasbrouck's (1995) Information Share and Lien and Shrestha's (2014) Generalized Information Share, we document strong time variation in the contribution to price discovery of the direct and inverse notes. We find that trading costs and market liquidity are significant determinants of price discovery. We further document that the informational leadership of the XIV increases on days when the VIX increases and on days with negative stock market returns.

  • Journal of Futures Markets: Volume 38, Number 5, May 2018
  • Asymmetric and nonlinear dynamics in sovereign credit risk markets

    We employ asymmetric and nonlinear error correction models to characterize the price discovery and volatility interactions between the sovereign CDS and bond spreads for 22 reference entities. We find asymmetric, nonlinear, and bidirectional short and long‐run information flow in the first and second moments. The flow from the CDS to the bond market is stronger than in the reverse direction, demonstrating that CDS market is the more effective vehicle for price discovery. The persistence of volatility implies that informed trading occurs in the CDS markets. Both markets seem to converge to an equilibrium relationship when the basis is large.

  • Macroeconomic news announcements, systemic risk, financial market volatility, and jumps

    I study the second‐moment response to macroeconomic news announcements in financial markets. Responses can be decomposed into contributions from continuous volatility and discrete jumps. Disagreement and uncertainty are introduced to measure the second moments of market forecasts. Two decades of high frequency equity and bond futures data are examined including the global financial crisis. I report evidence that uncertainty has a stronger effect on the second‐moment response than disagreement and the second‐moment response is influenced by the level of financial stress and monetary policy regime. The zero‐lower‐bound interest rate policy constrains second‐moment responses in the bond market.

  • Quadratic approximation of the slow factor of volatility in a multifactor stochastic volatility model

    A new multifactor stochastic volatility model is proposed in which the slow volatility factor is approximated by a quadratic arc. The perturbation technique is used to obtain the approximate expression for the European option price. The notion of a modified Black‐Scholes price is introduced. A simplified expression for the European option price, perturbed around the modified Black‐Scholes price, is obtained. An expression of modified price is also obtained in terms of the Black‐Scholes price. The effect of this modification on pricing is explained, the accuracy of the approximate option pricing formula established, and its computational cost discussed.

  • Investor attention and stock market under‐reaction to earnings announcements: Evidence from the options market

    Using a broad sample of earnings announcements, we show that the initial stock market's response substantially increases and the post‐earnings announcement drift becomes much weaker in the presence of more active pre‐earnings option trading. We find that the strongest initial stock market's response originates from those announcements with higher pre‐earnings option trading, fewer competing announcements, and made on non‐Fridays. Our interpretation is that the heightened investor attention, as captured by higher pre‐earnings option trading, fewer competing announcements, and non‐Friday announcements, accelerates the stock market's response and mitigates the stock market under‐reaction.

  • Investor sentiment and the Chinese index futures market: Evidence from the internet search

    We use the search volume index in Baidu to reveal investor sentiment in the Chinese stock index futures market. We find that the abnormal search volume index predicts return reversal in the short term where the effect is mainly caused by the searches of investors who use personal computers rather than mobile devices. We also find that restriction on futures trading changes the relation between the abnormal search volume index and returns significantly. Overall, we provide a new set of results on the effects of investor sentiment on Chinese index futures markets.

  • Journal of Futures Markets: Volume 38, Number 4, April 2018

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