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Trading Mechanisms, Speculative Behavior of Investors, and the Volatility of Prices

Trading Mechanisms, Speculative Behavior of Investors, and the Volatility of Prices
Author: Hun Y. Park
Publisher:
Total Pages: 56
Release: 1989
Genre: Prices
ISBN:
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This paper compares the volatility of spot prices (dealership market) with that of futures prices (auction market) to test the implications of different trading mechanisms for the volatility of prices. First, a natural estimator of the volatility is sued. Using the intraday data of the major Market Index and its futures prices, we show that the volatility of opening prices is higher than that of closing prices not only in the spot market but in the futures market, and that the intraday volatility patterns are U-shaped in both markets. Of particular interest is that futures prices do not appear to be as volatile as spot prices when the natural estimator of volatility is used, to the contrary of the conventional wisdom. We argue that the different volatility patterns during the day are not necessarily due to the different trading mechanisms, auction market versus dealership market. Instead, after developing a simple theoretical model of speculative prices, we show that at least part of the different volatility patterns during the day may be attributable to speculative behavior of investors based on heterogeneous information. In addition, we further investigate the volatilities of spot and futures prices using a temporal estimator of price volatility as an alternative to the natural estimator. Based on the temporal estimator, we cannot find any systematic pattern of volatilities during the day in both spot and futures markets, and that futures prices appear to be more volatile than spot prices in terms of how quickly the price moves beyond a given unit price level, but not in terms of how much the price changes during a given unit time interval. Some policy implications are also discussed.

The Information Content of Prices in Derivative Security Markets

The Information Content of Prices in Derivative Security Markets
Author: Louis O. Scott
Publisher: International Monetary Fund
Total Pages: 42
Release: 1991-12-01
Genre: Business & Economics
ISBN: 1451932553
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Prices in futures markets and option markets reflect expectations about future price movements in spot markets, but these prices can also be influenced by risk premia. Futures and forward prices are sometimes interpreted as market expectations for future spot prices, and option prices are used to calculate the market’s expectations for future volatility of spot prices. Do these prices accurately reflect market expectations? The purpose of this paper is to examine the information that is reflected in futures prices and option prices. The issue is examined by reviewing both the relevant analytical models and the empirical evidence.

Impacts of Derivative Markets on Spot Market Volatility and Their Persistence

Impacts of Derivative Markets on Spot Market Volatility and Their Persistence
Author: Chulwoo Han
Publisher:
Total Pages: 11
Release: 2014
Genre:
ISBN:
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In this article, I investigate the impacts of futures and options markets on the volatility of the underlying market with a focus on their persistence over time. Empirical study yields several interesting results that often contrast with previous findings. it suggests that the impacts on the spot market volatility depends on the quality of new information generated by derivatives trading. Futures market reduces spot market volatility by providing new, material information, but options market generates noisy information which results in increase in volatility and decrease in its sensitivity to price change. While the impact by futures persists, that of options mostly disappears as the market matures. This is perhaps because futures market is mainly driven by informed, experienced participants, while options market attracts new, inexperienced investors. It would be worth revisiting other markets with the methods in this study and testing validity of the conclusions made in previous studies.

The Relationship Between Futures Market Speculation and Spot Market Volatility

The Relationship Between Futures Market Speculation and Spot Market Volatility
Author: Xuemei Xiao
Publisher:
Total Pages: 74
Release: 2018
Genre:
ISBN:
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This thesis investigates the relationship between speculation in futures markets and expected and unexpected volatility in the spot markets for 21 different commodities. I use the index of adequate speculation, INDADSP, and the index of excess speculation, INDEXSP, developed and estimated by Shanker (2017), to capture the degree of speculation required to meet hedging demand, and the degree of speculation in excess of hedging demand, respectively. For comparison, I also use Working's (1960) speculative index T, as a measure of speculation. I estimate the expected volatility (EV) and unexpected volatility (UEV) of the spot market using a GARCH model. The empirical results indicate that the GJR-GARCH model with a Student's t distribution for the error term is the most appropriate model, among the GARCH-family of models, to capture the volatility of 17 of the 21 spot commodity returns. However, the results of feeder cattle indicate the exists of serial correlation of the residuals for all three GARCH model I used, so I drop it and do the further analysis for the rest of 20 commodities and financial contracts. For each commodity, I create time series of matched weekly indices of speculation, expected volatility and unexpected volatility. Next, I investigate the long-run and short-run relationships between volatilities and speculation using an autoregressive distributed lag model. The results indicate that there is a long term relationship between expected and unexpected volatility and the speculative indices, for all commodities, except the Euro, Eurodollar, and U.S. T-bond, and a short term relationship between volatilities and speculation for all commodities. Finally, I apply the Toda-Yamamoto test to investigate the causal relationship between speculation in futures markets and volatility in spot markets. I find that speculation tends to lead expected volatility more than unexpected volatility for the majority of commodities/financial assets. Expected volatility, rather than unexpected volatility, tends to lead speculation for a majority of commodities/financial assets. There is a bidirectional causality between expected volatility and INDADSP, INDEXSP, and T and between unexpected volatility and INDEXSP for several different commodities and financial assets. However, there is no bidirectional causality between unexpected volatility and the speculative indices INDADSP and T for all 20 commodities/financial assets.

Volatility Spillovers Between Spot and Futures Markets

Volatility Spillovers Between Spot and Futures Markets
Author: Velmurugan Palaniappan Shanmugam
Publisher:
Total Pages: 24
Release: 2017
Genre:
ISBN:
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In well-established and matured agricultural commodity futures market, like U.S., the futures markets are expected to serve as a central exchange for both domestic and international information and thus function as a primary mechanism for price discovery and reduce price variability through hedging activities. After having outlined the present status of U.S. agricultural commodities market, a comprehensive study on the volatility spillover between the spot and futures markets of 12 agricultural commodities is carried out to understand the dynamics of volatility factors which hinder the efficiency of those markets, by comparing two different time periods which stand different by various economical and market conditions, for arriving at relative conclusions. The Granger Causality Test results on the direction of flow of volatility between the spot and futures market shows that in majority of the commodities (6 commodities during 1995-2005 & 7 commodities during 2006-2011) there were unidirectional flow of from futures to spot markets, meaning that futures markets has significantly contributed to the volatility of spot market. There were bidirectional relationship in 5 commodities in 1995-2005 & 3 commodities in 2006-2011. This shows that due to information flow from both sides, spot to future markets and future market to spot market, both were equally responsible for causing volatility. Overall there is no evidence of abnormal volatility in the sub-period 2006-2011, compared to1995-2005. Abnormality of non-directional flow is identified in CBOT wheat during 2005-2011 which means that factors beyond futures market were responsible. Whereas, from the GARCH (1, 1) results, in terms of volatility, there is volatility clustering and persistence throughout the study period, with no abnormality during post 2006 period alone. To be specific, we show that volatility in U.S. agricultural commodities markets were prevalent during 1995-2005 and during 2006-2011, which experienced price spikes and price distortions. Hence, we conclude that huge in-flow of funds into the agricultural commodity futures market since 2006 is not the reason for volatility in US agricultural commodity market.