settlement tax and non synchronous effects in the basis of u k stock index futures abstract the basis in stock index futures markets is analytically and empirically studied in this paper within a no arbitrage cost of carry framework explanatory power improved when the implications of the u k stock exchange settlement system were introduced into the modelling process and until recently with the maturity of the market evidence indicating the presence of non synchronicities between the cash and futures markets was found strong evidence for tax effects upon the basis was not found to be present in the data analysed statistically significant relationships between basis mispricing and volume and volatility were found

the impact of minimum trading units on stock value and price volatility we study how minimum trading unit changes on the tel aviv stock exchange impact a stock s trading activity price volatility and value the value effects are consistent with merton s 1987 model i e an increase in the investor base trading volume and a decrease in price noisiness affect stock value positively our results extend amihud mendelson and uno s 1999 tests of merton by demonstrating a clear relation between price noisiness changes and stock value changes and by showing that the response to a minimum trading unit decrease becomes less favorable and arguably even negative in the thinnest trading stocks

s p 500 cash stock price volatilities s p 500 stock return volatilities are compared to the volatilities of a matched set of stocks after controlling for cross sectional differences in firm attributes known to affect volatility no significant difference in volatility is observed between 1975 and 1983before the start of trade in index futures and index options since then s p 500 stocks have been relatively more volatile the difference is statistically but not economically significant the relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns other factors besides the start of derivative trade could be responsible for the small increase in volatility stock price volatility has received much attention in the popular press over the last few years especially since the october 19 1987 stock market crash the rise in volatility has alarmed investors regulators and the public in general some suggest that the start of trade in stock index futures and index options increased speculative activity that in turn destabilized cash markets causing higher volatility large trading activity in the derivative contracts makes the suggestion plausible volume in index futures and index options increased dramatically since their introductions in 1982 and 1983 by 1987 the average daily dollar volume in the s p 500 futures contracts alone exceeded the dollar volume of cash s p 500 trade by a factor of about two while the dollar value of the daily net change in total open interest is about 8 of s p 500 stock dollar volume speculative trade in futures and options frequently is accused of destabilizing underlying cash markets the charge has been made for more than a century in the agricultural precious metal and currency markets recent evidence by french and roll 1986 showing stock variance to be strongly related to trading session hours heightens these concerns unfortunately theoretical analyses of whether speculative trade destabilizes cash markets lead to conflicting conclusions depending on what assumptions are made 1 school of business administration university of southern california and office of economic analysis u s securities and exchange commission i wish to thank mary denny mcsweeny and steve hornstein for their valuable research assistance and the referee and editor for their many suggestions and insights the opinions expressed in this paper do not necessarily reflect those of the u s securities and exchange commission or those of the author s colleagues on its staff an increase in well informed speculative trade has two opposite effects on measured volatility it decreases volatility due to order flow imbalances caused by uninformed traders because informed traders provide liquidity in such events and it increases volatility due to new fundamental information since the information which is assumed to be generated at discrete time intervals is impounded into

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

program trading and expiration day effects the arbitrage between index futures and the underlying cash index and the cash settlement feature of index futures contracts which requires arbitrageurs to unwind positions in the stock market are thought to be at the heart of the abnormal stock price movements during the triple witching hour the last hour of trading on days on which index futures index options and options on index futures expire simultaneously during 1984 and 1985 volume was substantially higher than normal in the last hour of trading on those quarterly fridays open interest in the expiring futures contracts on the expiration day amounted to about 40 per cent of the average month end open interest the incremental stock market volume however was approximately one third the volume that would be inmplied if the entire expiration day open interest were traded in the stock market analysis of stock market price changes in the last hour of expiration days and the first halfhour of the following day indicates that the volatility of price changes was significantly higher on expiration days with the stock market tending to fall stocks not in the sp index option expirations themselves did not lead to abnormal market movements when the magnitude of price effects was measured by the degree of reversal in prices on the morning after the expiration day the average magnitude of the price effect in the 10 most recent quarterly futures contract expirations examined was about 0 4 per cent of the closing index value at expiration the average expiration day price effect of 0 4 per cent is not large considering that a price impact of approximately 0 25 per cent of the value of the transaction can be expected on the basis of the bid ask spread once this market impact cost is drawn out the average expiration day price impact falls to about 0 15 per cent of the value of the transaction an amount representing the additional cost of liquidity furthermore price impacts in excess of those found on expiration days are frequently encountered in large block transactions where the cost of providing liquidity also increases on expiration days however transactions in many stocks occur simultaneously so the market as a whole is affected

the cost of a licensing system regulation an example from canadian prairie agriculture agricultural legislation and the resultant regulation that usually ensues can often change redirect or even stop the adoption of yieldincreasing technologies that have the potential to generate substantial economic rents this paper offers an example from the canadian wheat sector of how a variety licensing regulation had totally stopped the adoption of a yield increasing technology that had the potential to increase the economic rents flowing to western canadian farmers by 15 25 percent this regulation further prevented high internal rates of return greater than 50 percent from being generated by research into this new technology

execution risk in high frequency arbitrage in this paper we investigate the role of execution risk in high frequency trading through arbitrage strategies we show that if rational agents face uncertainty about completing their arbitrage portfolios then arbitrage is limited even in markets with perfect substitutes and convertibility using a simple model we demonstrate that this risk arises from the crowding effect of competing arbitrageurs entering the same trade and inflicting negative externalities on each other our empirical results provide evidence that support the relevance of execution risk in high frequency arbitrage this paper was accepted by wei xiong finance

the gains from agricultural research under distorted trade abstract this paper explores the gains from research issue within the framework of a product which is traded with the aid of export subsidies because of the taxpayer burden associated with increased exports it is quite possible for the returns to research to be negative a decline in the rate of protection through a rising world market leads to a linear increase in the gains from research while a rise in the internal support price will cause a non linear and negative response if the supply shift is pivotal and a linear and negative response if it is parallel finally global returns to research will be higher than individual country returns and will always be positive in a free trade environment

another day another collar an evaluation of the effects of nyse rule 80a on trading costs and intermarket arbitrage in 1990 the new york stock exchange amended its rule 80a to restrict stock index arbitrage on days of large price movements the authors find that rule 80a significantly curtails or collars index arbitrage activity in spite of this curtailment in index arbitrage volume they find that rule 80a appears to have had little overall impact on trading costs and intermarket linkage although pricing discrepancies between the markets do appear to be eliminated less quickly the authors results are consistent with the hypothesis that information is conveyed from one market to the other by means other than formal arbitrage copyright 1998 by university of chicago press

new evidence on the monday seasonal in stock returns equity derivatives and the institutionalization of equity markets affect the monday seasonal the seasonal in the standard and poor s 500 s p declines significantly over 1962 93 this decline is positively related to the ratio of institutional to individual trading volume in contrast the seasonal for small stocks does not decline and is unaffected by institutional versus individual trading higher trading costs sustain the seasonal in small stocks and unlike the s p these costs are not lower for institutions than for individuals futures minus spot s p returns exhibit a reverse seasonal informed traders use the less costly market to exploit the seasonal copyright 1997 by university of chicago press

the international crash of october 1987 causality tests the paper analyzes lead lag relationships for six major stock market indexes new york s p 500 tokyo nikkei london ft 30 hong kong hang seng singapore straits times and australia all ordinaries for time periods before during and after the october 1987 market crash unidirectional and bidirectional causality tests are conducted by means of the granger methodology practically no lead lag relationships are found for the pre crash and post crash periods however important feedback relationships and unidirectional causality are detected for the month of the crash there is also an increase in contemporaneous causality during and after the month of the crash in general our findings suggest that the october 1987 market crash probably was an international crisis of the equity markets and that it might have begun simultaneously in all the national stock markets

portfolio serial correlation and nonsynchronous trading common stock portfolios of large heavily traded firms exhibit daily first order serial correlation in excess of what would be expected given the individual security coefficients further this correlation rises as the number of securities in the portfolio increases the direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices related implications are also discussed

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

a transactions data analysis of nonsynchronous trading weekly returns of stock portfolios exhibit substantial autocorrelation analytical studies suggest that nonsynchronous trading is capable of explaining from 5 to 65 of the autocorrelation the varying importance of nonsynchronous trading in these studies arises primarily from differing assumptions regarding nontrading periods of stocks we simulate the effects of nonsynchronous trading by sampling stock returns from a return generating process using transactions data to obtain the precise time of each stock s last trade we find that simulated weekly portfolio returns exhibit autocorrelations that are roughly 25 that of their observed crsp weekly returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

stock volatility and the levels of the basis and open interest in futures contracts this article tests a theoretical model of the basis and open interest of stock index futures the model is based on the differences between stock and futures in terms of investors ability to customize stock portfolios and liquidity empirical evidence confirms the model s prediction that increased volatility decreases the basis and increases open interest copyright 1995 by american finance association

a transactions data test of stock index futures market efficiency and index arbitrage profitability this paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for the chicago board of trade s major market index contracts the spot value of the index is computed with transactions prices for the component shares of the index obtained from the fitch database the tests account for transaction costs execution lags and the uptick rule for short sales of stocks results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time index arbitrage is a strategy whereby institutions brokerage houses or other large investors seek to profit from the spread between prices in the spot and futures markets for stock indices for example an investor might purchase predetermined baskets of stocks on the floor of the new york stock exchange and simultaneously sell a related index futures contract on the floor of the chicago board of trade hoping to profit from the price differences on the two exchanges computer programs constantly monitor stock and futures prices and automatically execute buy and sell orders when it appears that a profit is possible stock index futures can be priced by a simple arbitrage argument if the dividends paid by the underlying basket of shares and interest rates are nonstochastic markets are perfect and there are no taxes the pricing equation is

segregating genetically modified and nongenetically modified corn in a marketing channel the adoption of gm corn in the united states depends on many factors including segregation costs which have minor impacts on aggregate welfare because the demand for nongm corn is small relative to its supply no premium for nongm corn can be generated in excess of the segregation costs an outward shift in the supply of corn resulting from the adoption of gm varieties has a greater impact on aggregate welfare than do the segregation costs required to satisfy the gm free demand a 10 increase in the aggregate supply of gm corn increases aggregate welfare by more than us 250 million however nonadopters of gm corn lose while adopters can gain or lose depending on the nature of the aggregate demand curve for us corn

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

the value of shorting abstract this paper assesses the effects of short sale constraints on asset prices the analysis focuses on a particular period in sweden during which shorting stocks was impossible but stock options were traded firstly the effect on both stock options and the underlying stock was investigated jointly by considering deviations from put call parity secondly the effects on only the derivatives were investigated by considering their implied volatilites the main findings are i the impact on pricing are consistent with a short sale constraint ii these effects are much more pronounced when shorting is not possible iii these effects are not solely attributable to the mispricing of the stock as previous research indicates and iv access to international shorting markets can alleviate local short sale constraints

the asian financial crisis the role of derivative securities trading and foreign investors in korea abstract this paper is part of a larger research program pertaining to the role of derivatives during financial crisis and also part of the research pertaining to the causes of the asian financial crisis the korean market is studied because of two reasons 1 it is an important example of the asian financial meltdown and 2 there is a detailed data set available of all transactions by different types of protagonists including foreign investors the results in this paper indicate that futures markets and trading by foreign investors played a key role during the korean stock market turbulence in 1997

friction in the trading process and the estimation of systematic risk abstract this paper considers how estimates of the market model beta parameter can be biased by friction in the trading process information decision and transaction costs that a leads to a distinction between observed and true returns b causes observed returns to be generated asynchronously for a set of interdependent securities and c thereby introduces serial cross correlation into security returns several propositions are derived from which consistent estimators of beta are obtained and the effect of differencing interval length on beta estimates is specified the formulation is contrasted with the related analyses of scholes williams 1977 and dimson 1979

the dynamics of stock index and stock index futures returns in rational efficiently functioning markets the returns on stock index and stock index futures contracts should be perfectly contemporaneously correlated this study investigates the time series properties of 5 minute intraday returns of stock index and stock index futures contracts and finds that sp however the effect is not completely unidirectional with lagged stock index returns having a mild positive predictive impact on futures returns

discussion of anomalous stock returns around internet firms earnings announcements abstract trueman wong and zhang twz investigate an apparent anomaly in the pricing of internet firms around their earnings announcements which they attribute to price pressure the discussion addresses three concerns the paper is unusual in choosing an event earnings announcements that does not appear to have an obvious non information related reason for triggering unjustified changes in demand for the firm s shares relatedly there are limitations to the tests made of the price pressure hypothesis finally the discussion elaborates on twz s brief mention of the difficulties with implementing a profitable trading strategy based on the stock return pattern they document

one market stocks futures and options during october 1987 we provide new evidence regarding the degree of integration among markets for stocks futures and options prior to and during the october 1987 market crash where previous analyses have resulted in recommendations for the implementation of circuit breakers the coordination of margin requirements across markets and changes in regulatory jurisdiction our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders the results suggest that market integration may be better served by efficient order execution than by further restricting markets

the temporal price relationship between s p 500 futures and the s p 500 index this paper empirically examines the intraday price relationship between s p 500 futures and the s p 500 index using minute to minute data three stage least squares regression is used to estimate lead and lag relationships with estimates for expiration days of the s p 500 futures compared with estimates for days prior to expiration the results suggest that futures price movements consistently lead index movements by twenty to forty five minutes while movements in the index rarely affect futures beyond one minute

arbitrage nontrading and stale prices october 1987 this article explains a puzzle created by the standard and poor s 500 cash and futures prices during the crash of october 1987 the cash index appears to be a moving average of the futures but nontrading in constituent stocks explains only the initial period of delayed openings however execution of stale limit buy orders given the high volume and nyse market mechanisms at the time resulted in extraordinary levels of stock prices that were not caused by nontrading the model is supported in aggregate s p data and transactions data for individual stocks copyright 1992 by university of chicago press

a further analysis of the lead lag relationship between the cash market and stock index futures market the intraday lead lag relation between returns of the major market cash index and returns of the major market index futures and s p 500 futures is investigated empirical results show strong evidence that the futures leads the cash index and weak evidence that the cash index leads the futures the asymmetric lead lag relation holds between the futures and all component stocks including those that trade in almost every five minute interval evidence indicates that when more stocks move together market wide information the futures leads the cash index to a greater degree this suggests that the futures market is the main source of market wide information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

s p 100 index option volatility using transaction data on the s p 100 index options we study the effect of valuation simplifications that are commonplace in previous research on the timeseries properties of implied market volatility using an american style algorithm that accounts for the discrete nature of the dividends on the s p 100 index we find that spurious negative serial correlation in implied volatility changes is induced by nonsimultaneously observing the option price and the index level negative serial correlation is also induced by a bid ask price effect if a single option is used to estimate implied volatility in addition we find that these same effects induce spurious and unreasonable negative cross correlations between the changes in call and put implied volatility an important area of current research is the estimation and behavior of market volatility implied by option pricing models for example stein 1989 concludes that the s p 100 index option market is inefficient because longer term options overreact to changes in the implied volatility of short maturity options day and lewis 1988 document an increase in volatility around the quarterly expiration cycle schwert 1990 draws conclusions about the behavior of volatility around the stock market crash of 1987 by using implied volatility all of these studies use a simplified option pricing framework to estimate implied market volatility previous research generally assumes that the s p 100 index option is european style this option is actually american style it is also common to assume that the dividend yield is constant the dividends are not constant and exhibit distinct seasonal patterns harvey and whaley 1991b show that large pricing errors can be induced in the option prices if the american feature and the discrete dividends are ignored option pricing errors translate into errors in the implied volatility estimates this paper uses s p 100 index call and put transactions and an american style option pricing model with the exact discrete dividend series to calculate a time series of implied volatilities this valuation method

program trading and intraday volatility program trading and intraday changes in the s p 500 index are correlated future prices and to a lesser extent cash prices lead program trades index arbitrage trades are followed by an immediate change in the cash index which ultimately reverses slightly no reversal follows nonarbitrage trades the cumulative index changes associated with buy and sell trades and with arbitrage and nonarbitrage trades all are similar price decompositions suggest that the results are not due to microstructure effects program trades in this 1989 1990 sample do not seem to have created major short term liquidity problems the results are stable within the sample many practitioners regulators and public commentators have expressed concerns about potential destabilizing effects of program trading they argue that program trades especially index arbitrage programs increase intraday volatility and decrease

program trading and market volatility a report on interday relationships ten months of daily observations on stock market volatility and program trading on the nyse reveal no relation between volatility and program trading intensity the days on which volatility was high were not systematically the days on which program trading intensity was high this is evident both from casual observation of the data and from analyses of the correlation and regression results there does appear to be however a positive relation between the intensity of dot volume relative to nyse volume and volatility there also appears to be a positive relation between the intensity of non program dot volume relative to nyse volume and volatility this suggests that very volatile days are also days when the retail customer generated dot order flow is large relative to institutional block trades which are not dot delivered

options resilience during extreme volatility evidence from the market events of may 2010 abstract using intraday trades and quotes data we study the stock options market before during and after the market events of may 6 2010 focusing on the s p 500 and s p 100 stock options we explore if the options market provided any discernible signals that forewarned the extreme volatility on that day and whether the recovery was fast and without a permanent impact we find that the options market reacted to the volatility rather than predicting it and almost all of the variables are indistinguishable from their previous levels in the next few trading days intraday empirical analysis suggests that most of the impact was over within a few hours from the peak of market volatility

firm specific information and the correlation between individual stocks and bonds abstract this paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm and finds that they are negatively and contemporaneously correlated this suggests that individual stocks and bonds are driven by firm specific information that is predominantly related to the mean rather than the variance of the firm s underlying assets furthermore i find that lagged stock returns have explanatory power for current bond yield changes while current stock returns are unrelated to lagged bond yield changes this shows that stocks lead bonds in reflecting firm specific information

index arbitrage with heterogeneous investors a smooth transition error correction analysis abstract the traditional index arbitrage model assumes a constant threshold mispricing between the futures and cash prices for all investors allowing for heterogeneity in investors transaction costs objectives and capital constraints we model the intraday mispricing of djia futures as a smooth transition autoregressive star process with the speed of adjustment toward equilibrium varying directly with the mispricing we show that the observed mean reversion in mispricing changes is induced by heterogeneous arbitrageurs instead of a statistical illusion infrequent trading of index portfolio stocks we further use a star error correction model to describe the nonlinear dynamics between the djia futures and index this model describes not only which market is more informationally efficient than the other but also the legging process the nonsimultaneous establishing of cash and futures positions

economic impacts of the california one variety cotton law the california one variety cotton law is an important example of technological regulation in this case intended to serve as a de facto quality control and to mitigate externalities in production that can arise from the mixing of cottonseed at the gin this paper describes and interprets the economic history of the law presents a theoretical model of its economic effects and provides quantitative estimates of the impacts on output prices and economic welfare following a partial deregulation under a 1978 amendment to the law the analysis shows that large social costs have arisen from concentrating control over the genetic base for california cotton production in the hands of a single government cotton breeder and restricting production to the use of a single selection of a single variety some of these costs have been eliminated by the partial deregulation in 1978 to permit private breeders to compete in the provision of genetic material but production is still restricted to the acala variety of cot

crises in developed and emerging stock markets stock market crises in the developed markets differ in important ways from the crises in emerging stock markets our study of nine crises in the 1970 97 period indicates that developed market crises have become less severe over time in terms of both the extent of price decline and duration but those in emerging stock markets have not in both markets prices fall for at least three years subsequent to recovery from a crisis and the crisis in one market is likely to be followed by crises in most other markets in the region nevertheless even in times of crises international stocks continue to provide diversification benefits for u s investors with long investment horizons

stock market structure and volatility the procedure for opening stocks on the nyse appears to affect price volatility an analytical framework for assessing the magnitude of the structurally induced volatility is presented the ratio of variance of open to open returns to closeto close returns is shown to be consistently greater than one for nyse common stocks during the period 1982 through 1986 tbe greater volatility at the open is not attributable to the way in which public information is released since both the opento open return and the close to close return span the same period of time instead the greater volatility appears to be attributable to private information revealed in trading and to temporaryprice deviations induced by specialist and other traders the implied cost of immediacy at the open is significantly higher than at the close other empirical evidence in this article documents the volume of trading at the open the time delays between the exchange opening and the first transaction in a stock the difference in daytime volatility versus overnight volatility and the extent to which volatility is related to trading volume

information and index arbitrage a random cash futures basis is derived in a dynamic multimarket learning game with sequential information shocks and strategic arbitrageurs who trade to exploit gaps in the basis statistical properties of the authors theoretical basis are derived both with and without index arbitrage the authors find that basis volatility a measure of intermarket mispricing may initially increase even as individual prices become more precise and that arbitrage reduces basis volatility the model is also used to analyze regulatory issues such as the possible impact of circuit breakers on the quality of the trading process copyright 1994 by university of chicago press

measuring true stock index value in the presence of infrequent trading based on the beveridge nelson 1981 decomposition of an arima process i present a measure of true stock index value that is not directly observable due to infrequent trading of stocks the technique is illustrated with daily observations of the russell 2000 index this new measure might well prove useful in studies of lead lag relationships between index derivatives and spot market and futures basis measurements

box spread arbitrage profits following the 1987 market crash real or illusory we examine market efficiency before and after the 1987 market crash using the box spread strategy implemented with european style s p 500 index spx options before the crash apparent arbitrage opportunities were rare and simulated trades were unprofitable assum ing a one minute execution delay after the crash apparent arbitrage opportunities were frequent and simulated trades were profitable even assuming a five minute execution delay our analysis makes the routine assumption that quotes are good until updated to construct a time series of prevailing quotes sampled at 30 second intervals if this assumption is valid then arbitrage profits were actually available if this assumption is invalid then such profits could have been illusory either scenario however implies that spx market effi ciency decreased following the crash prevailing price quotes repeatedly failed to satisfy the fundamental parity relation underlying the box spread

spillovers of volatility index evidence from u s european and asian stock markets abstractwe investigated the cross market relations of volatility indexes with u s and non u s stock market returns we found that the pervasive vix influence at both u s and non u s stock markets the vstoxx and vkospi capture the major shocks to the global economy and show movements similar to the vix the empirical findings indicate that volatility index changes are important in explaining stock returns we also examined spillover effects across volatility indexes the vix is a main transmitter and the vkospi the main receiver of these spillovers the results point to a leading role for the vix in the international market

adaptive expectations and stock market crashes a theory is developed that explains how stocks can crash without fundamental news and why crashes are more common than frenzies a crash occurs via the interaction of rational and naive investors naive traders believe that prices follow a random walk with serially correlated volatility their expectations of future volatility are formed adaptively when the market crashes naive traders sell stock in response to the apparent increase in volatility since rational traders are risk averse as well a lower price is needed to clear the market the crash is a self fulfilling prophecy frenzies cannot occur in this model

nonsynchronous security trading and market index autocorrelation the theoretical portfolio autocorrelation due solely to nonsynchronous trading is estimated from a derived model this estimated level is found to be substantially less than that observed empirically the theoretical and empirical relationship between portfolio size and autocorrelation also is investigated the results of this study suggest that other price adjustment delay factors in addition to nonsynchronous trading cause the high autocorrelations present in daily returns on stock index portfolios

intraday relationships among index arbitrage spot and futures price volatility and spot market volume a transactions data test abstract this paper examines intraday temporal relationships among arbitrage spreads cash and futures price volatility and cash trading volume using transactions data for the major market index futures contracts and the component stocks of the index results indicate that changes in the spread have a significant impact on cash and futures price volatility as well as on cash trading volume the impact of the spread however is attenuated by the short sale restriction in the cash market contrary to popular beliefs a more volatile market leads to subsequent decreases in the spread probably because of increases in the supply of arbitrage services or faster price adjustments

intraday volatility in the stock index and stock index futures markets we examine the intraday relationship between returns and returns volatility in the stock index and stock index futures markets our results indicate a strong intermarket dependence in the volatility of the cash and futures returns price innovations that originate in either the stock or futures markets can predict the future volatility in the other market we show that this relationship persists even during periods in which the dependence in the returns themselves appears to weaken the findings are robust to controlling for potential market frictions such as asynchronous trading in the stock index our results have implications for understanding the pattern of information flows between the two markets article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

price limit performance evidence from the tokyo stock exchange price limit advocates claim that price limits decrease stock price volatility counter overreaction and do not interfere with trading activity conversely price limit critics claim that price limits cause higher volatility levels on subsequent days volatility spillover hypothesis prevent prices from efficiently reaching their equilibrium level delayed price discovery hypothesis and interfere with trading due to limitations imposed by price limits trading interference hypothesis empirical research does not provide conclusive support for either positions we examine the tokyo stock exchange price limit system to test these hypotheses our evidence supports all three hypotheses suggesting that price limits may be ineffective

program trading and individual stock returns ingredients of the triple witching brew the price and trading volume behaviors of individual stocks in the standard and poor s 500 stock index s p 500 are analyzed on stock index futures expiration days a time when the market is known to be subject to heavy program trading the price behavior of stocks that are subject to program trading is shown to be very similar to stocks that are not stocks that decline in price in the last half hour friday tend to increase in price at the opening on monday and vice versa the monday reversal as a fraction of the friday price change is only slightly higher for the s p 500 stocks than for non s p 500 stocks indicating that the price reversals reflect for the most part the bid ask spreads of the individual stocks trading volume in the last half hour of expiration days is shown to be substantially higher than normal copyright 1990 by the university of chicago

stock index futures does the tail wag the dog the increase in program trading based on a comparatively narrow blue chip stock market barometer the major market index mmi is said to be fueling volatile price swings in the stock market a case of the tail wagging the dog the mmi is a price weighted index of 20 very actively traded stocks 16 of which are included in the dow jones 30 industrials because of its relatively small size the mmi is expected to be more easily arbitragible than other stock index futures contracts basically program trading involves taking a position long or short in a portfolio of stocks comprising the index and simultaneously taking an opposite position in the index futures contracts the objective of the program trade is to create a risk free position that earns a return in excess of the currently available risk free return program trades may move both the futures and the spot market the chain of causality may work as follows 1 investors believe the stock market will rise and they purchase futures contracts in expectation of higher equity values the purchase of the contracts is preferable to the purchase of the underlying stocks because it entails no initial investment and lower transaction costs 2 the rise in futures prices causes an imbalance between the prices of the futures and the underlying index as this premium between futures and index increases it may become profitable to execute a program trade 3 the simultaneous sale of futures and purchase of the underlying index will cause the premium between the futures and index to shrink changes in factors such as interest rates can also affect the equilibrium relation between the index price and the futures price thereby changing the premium or discount between the two markets program traders can take advantage of any change in the spread between the markets it does not matter what causes the change in spreads whether internal factors such as changes in investor expectations or external factors such as interest rate changes all program trading does is to bring cash and futures prices together the program trade may be an essential mechanism that ensures that futures prices and underlying equity prices are efficiently determined and that the hedging effectiveness of the futures contracts is reliable to date most of the literature on the impact of futures trading on the cash market has focused on changes in spot price volatility because of the initiation or cessation of futures trading a common conclusion of these studies is that the futures market has a smoothing effect on the cash market stabilizing the spot price the recent uproar engendered by the triple witching hour and the so called crises at expiration brings into question the smoothing influence that futures have on the underlying index 2 if the market is efficient prices adjust instantaneously to reflect all relevant information and knowledge of such information cannot lead to excess risk adjusted returns the central concept in the efficient market hypothesis is the fair game model 3 a sequence of past returns over time is a fair game if today s price reflects the then available information making it impossible to earn excess risk adjusted returns by trading on that information if the information set today contains all the information known and used by the market participants in the spot market in determining the spot price one of the components of the information set is the previous change in the price of futures contracts 4 does the tail wag the dog the financial press and the sec have answered this question in the affirmative 5 this note investigates the impact of the futures market on the spot market by evaluating the relation between index futures price changes and subsequent spot index price changes in addition we evaluate the degree to which the expiration of the futures contract affects the underlying index

index futures arbitrage and the behavior of stock index futures prices this article examines intraday transaction datafor s p 500 stock indexfutures prices and the intraday quotes for the underlying index the data indicate that thefutures price changes are uncorrelated and that the variability of these price changes exceeds the variability ofprice changes in the s p 500 index this excess variability of the futures over the index remains even after controlling for the nonsynchronous prices in the index quotes which induces autocorrelation in the index changes we advance and examine empirically two hypotheses regarding the difference between the futures price and its theoretical value that this mispricing increases on average with maturity and that it is path dependent evidence supporting these hypotheses is presented

stock market crashes and the performance of circuit breakers empirical evidence this study examines the behavior of a small stock market with circuit breakers and with a one hour preauction order imbalance disclosure during the october 1987 crash the crash and its aftershocks lasted for a week and selling pressure was concentrated in higher beta larger capitalization and lower leverage firm stocks circuit breakers when implemented reduced the next day opening order imbalance and the initial price loss however they had no effect on the long run response some price overreaction and reversal phenomena also are documented

order imbalance liquidity and market returns traditionally volume has provided the link between trading activity and returns we focus on a hitherto unexplored but intuitive measure of trading activity the aggregate daily order imbalance on the new york stock exchange signed order imbalances increase decrease following market declines rises which reveals that investors are contrarians on aggregate order imbalances in either direction either excess buy or sell orders reduce liquidity market wide returns are strongly affected by contemporaneous and lagged order imbalances market wide returns reverse themselves after high negative imbalance large negative return days the magnitude of this reversal is partially predictable from the level of the imbalance and return even after controlling for aggregate market volume and liquidity market returns are affected by order imbalance

econometric analysis of grading standards the ordered fractional approach we present a method for estimating the quality of production when quality is measured by discrete grades and is thus both ordinal and fractional monte carlo experiments indicate that our method estimates average partial effects of quality determinants more accurately than linear estimators and provides estimates with low bias even with weak instruments an application of the model to wheat production in japan demonstrates the importance of disease control in determining wheat grade weather variable coefficients suggest that climate change could actually improve wheat quality in japan thereby allowing farmers to reduce fungicide use and other inputs as well as switch varieties

order imbalances and stock price movements on october 19 and 20 1987 on october 19 1987 nyse stocks in the s p index declined seven percentage points more than nyse stocks not in this index in the first hour of trading on october 20 the s p stocks virtually recovered to the level of the non s p stocks there is a strong relation between order imbalances and stock price movements both in analyses of time series and cross sections thus in addition to the breakdown in the linkage between future prices and the spot index on these two days there were also breakdowns in the linkage among nyse stocks

mean reversion of standard poor s 500 index basis changes arbitrage induced or statistical illusion mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers we propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion arising because many stocks in the index portfolio trade infrequently even without formal arbitrage reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated the implications of this study go beyond index arbitrage however our analysis suggests that spurious elements may creep in whenever the price change or return series of two securities or portfolios of securities are differenced mean reversion in stock index basis changes has been amply documented mackinlay and ramaswamy 1988 find significant negative first order autocorrelation in normalized intraday basis changes of the s p 500 index futures traded on the chicago mercantile exchange cme yadav and pope 1990 find similar behavior using financial times stock exchange ftse 100 index futures data from the london international financial futures exchange liffe as does lim 1990 using nikkei 225 index futures from the singapore international monetary exchange simex the trading activity of stock index arbitragers has been presumed to be driving this elastic realignment of stock index and index futures prices when the basis widens beyond its theoretical level arbitragers simultaneously sell index futures and buy the index portfolio pulling the difference between the futures and index

direct tests of index arbitrage models previous tests of stock index arbitrage models have rejected the no arbitrage constraint imposed by these models this paper provides a detailed analysis of actual s p 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models an analysis of arbitrage trades suggests that i short sale rules are unlikely to affect the cashfutures mispricing ii the opportunity cost of arbitrage funds exceeds the treasury bill rate and iii the average price discrepancy captured by arbitrage trades is small tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option the ability of these models to explain arbitrage trades however is surprisingly low

the october 1987 s p 500 stock futures basis five minute changes in the s p 500 index and futures contract are examined over a ten day period surrounding the october 1987 stock market crash since nonsynchronous trading problems are severe in these data new index estimators are derived and used the estimators use the complete transaction history of all 500 stocks nonsynchronous trading explains part of the large absolute futures cash basis observed during the crash the remainder may be due to disintegration of the two markets even after adjustment for nonsynchronous trading the index displays more autocorrelation than does the futures and the futures leads the index

the value of the initial payment of the canadian wheat board as a signaling device this paper analyzes the role of the initial payment used by the canadian wheat board cwb in the determination of export prices and sales under the assumption that the cwb has better information about realized yields in canada than its us competitor in the separating equilibrium of the game the initial payment of the cwb is larger than the initial payment under complete information there exists an incentive under incomplete information to send a signal that realized yields are greater than expected to induce a reduction in the sales of foreign competitors we illustrate the strategic value of the initial payment for canadian wheat producers using a numerical simulation

a tale of three schools insights on autocorrelations of short horizon stock returns this article reexamines the autocorrelation patterns of short horizon stock returns we document empirical results which imply that these autocorrelations have been overstated in the existing literature based on several new insights we provide support for a market efficiency based explanation of the evidence our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns

price and volatility co jumps abstract the nature of the dependence between discontinuities in prices and contemporaneous discontinuities in volatility co jumps has been reported by many as being elusive in terms of sign magnitude and statistical significance using a novel identification strategy in continuous time relying on trade level information for spot variance estimation as well as infinitesimal cross moments we document that a sizeable proportion of discontinuous changes in prices are associated with strongly anti correlated contemporaneous discontinuous changes in volatility assuming a possibly nonmonotonic pricing kernel we illustrate the equilibrium implications of price and volatility co jumps for return and variance risk premia

efficiency in index options markets and trading in stock baskets abstract researchers have reported mispricing in index options markets this study further examines the efficiency of the s p 500 index options market by testing theoretical pricing relationships implied by no arbitrage conditions the effect of a traded stock basket standard and poor s depository receipts spdrs on the link between index and options markets is also examined we find that pricing efficiency within option markets improves but there is little evidence to support the hypothesis that a stock basket enhances arbitrage across markets when transactions costs and short sales constraints are included very few violations of inter market pricing relationships such as put call parity are reported however violations of within market pricing relationships such as the box spread remain frequent extensive analysis suggests that the results are robust

dealer liquidity in an auction market evidence from the london stock exchange we analyse the trade characteristics and market conditions which determine the market share of a continuous auction trading system at the london stock exchange where a network of broker dealer firms is also available for trade we show that execution and information risks govern the choice of execution venue further we uncover strong commonality in the market share of the order book across stocks and find that variables proxying for market wide liquidity and informational risks also affect the choice of trading venue our results suggest that competing off book liquidity suppliers voluntarily perform at least some of the stabilisation functions normally assigned to designated market makers

intraday price change and trading volume relations in the stock and stock option markets this study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the cboe during the first quarter of 1986 after purging the price change series of the effects of bid ask spreads multivariate time series analysis is used to estimate the lead lag relation between the price changes in the option and stock markets the results indicate that price changes in the stock market lead the option market by as much as fifteen minutes the analysis of trading volume indicates that the stock market lead may be even longer the intense trading activity in and in fact the very existence of organized stock option markets attest to the economic benefits that these financial contracts provide reduced transaction costs and increased financial leverage are two reasons why trading in the stock option market may be more attractive than trading in the market for the underlying stock in addition these cheaper and more flexible trading opportunities attract new and differently informed investors to the marketplace the resulting increase in trading activity together with the inextricable arbitrage linkage between stock and option prices imply an increase in market efficiency this study investigates empirically the intraday price change and trading volume relations between stocks and options for a sample of firms whose options were actively traded on the chicago board options exchange during the first quarter of 1986 in particular intraday call option price changes are translated into implied stock price changes using the american call option pricing model these intraday implied stock price changes are then compared with the actual stock price changes to identify which if either market leads the other in perfectly functioning capital markets there should be complete simultaneity between the series that is new information disseminating into the marketplace should be reflected in the prices and the trading activity of both securities simultaneously institutional factors however may make the stock option market more attractive to information traders this may cause price changes and trading activity due to new information to be observed in the option market first followed by price

price formation on stock exchanges the evolution of trading within the day prior analyses of prices of the nyse and other exchanges find that transitory price volatility is greater at the open of trading than at the close we extend this line of research by using 40 years of hourly dow jones 65 composite price index data to estimate transitory volatility throughout the trading day our results indicate that transitory volatility steadily declines during the trading day we find a similar intraday decline in transitory volatility for a 2 1 2 year sample of the individual firms in the dow jones 30 industrials index the results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the saga of the first stock index futures contract benchmarks models and learning in the presence of imperfect or perturbed benchmarks pricing based on relative valuation or arbitrage can be affected adversely this study highlights persistent pricing irregularities in the kansas city value line kcvl stock index futures market this contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index empirical analysis reveals that during a four year period the market displayed herd like behavior and priced the kcvl geometric contract using the simple but wrong cost of carry benchmark model a dramatic change occurs around the publication of the eytan harpaz 1986 model when the market turns efficient from the perspective of this new model the market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking the evidence provides empirical extension to the observational social learning paradigms of simon 1955 banerjee 1992 and bikhchandani hirshleifer and welch 1992 that lead to behavioral herding and information cascades

intraday relationships between volatility in s p 500 futures prices and volatility in the s p 500 index abstract this paper examines the intraday relationships between the volatility of s p 500 futures prices and the volatility of the s p 500 index we calculate variance measures for minute to minute price changes on a daily basis and across 30 minute intervals the empirical results indicate that i futures volatility is greater than index volatility ii volatility increased for both futures prices and the index in absolute terms from 1984 through 1986 iii both futures and index volatility increased directly with futures trading volume and iv index volatility was systematically greater during the first 30 minutes of trading each day than at other times granger tests however reveal no systematic pattern of futures volatility leading index volatility or index volatility leading futures volatility

an argument for deregulating the transfer of agricultural technologies to developing countries in the past few decades many developing countries have liberalized trade and investment removing barriers to imports and allowing the introduction of new foreign technologies unfortunately agriculture often remains outside this reform process regulatory obstacles continue to restrain the transfer of technologies through private trade in seeds and other inputs industrial countries characteristically allow the transfer of private and public technologies through multiple channels developing countries often force technology transfer through a single channel controlled by government agencies with an emphasis on official performance tests this article analyzes the institutional arrangements governing the international transfer of new agricultural technologies examining the cases of agricultural machinery in bangladesh and seed varieties in turkey the analysis shows that allowing the private transfer of technologies and refocusing input regulations on externalities could lead to significant productivity and income gains in developing countries