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

effects of financial innovations on the money demand function a canadian evidence a money demand function for the candian economy has been estimated to explore if recent financial innovations have caused any significant change in the structural relationship between the demand for money and its determinants two sets of estimation results have been analysed the first set is obtained by estimating a standard money demand function for several overlapping sample periods and the other set is obtained by estimating a modified version which included a dummy or a ratchet variable to capture the effects of innovations the estimated equations have been used to generate ex post simulations and forecasts the results suggest that innovations have displaced the money demand function in the early 1980s it also appears that the incorporation of approriate innovation variables improves the predictive performance of the money demand function

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 forecasting approach to efficiency in the wool market this paper develops and presents estimates of a simultaneous equations model of the australian wool market the world s largest producer and exporter of fine wool the model contains functional relationships for unhedged inventories consumption of raw wool and the activities of both hedgers and speculators in wool futures expectations are represented by the adaptive hypothesis this model extends the work of leuthold and hartmann 1979 and leuthold and garcia 1988 by including expectations in the spot futures model and that of goss and giles 1986 by including composite equations for hedger speculators extending the expectations hypothesis to the consumption equation and by using the model to test the efficient markets hypothesis wald tests and likelihood ratio tests for unit roots in wool cash prices are conducted and in no case can the hypothesis of a single unit root be rejected estimation is by three stage least squares with correction for first order serial correlation the model provide

commodity price forecasting with large scale econometric models and the futures market this paper compares the accuracy of major commercial price forecasts for corn wheat soybeans soybean oil soybean meal cotton live cattle and hogs the price forecasting information in futures prices is evaluated by comparison the results among commercial forecasters are mixed but futures prices perform relatively better on average although not universally so these results have important implications for operational risk management

how does the stock market absorb shocks abstract using a comprehensive set of news stories we find a stark difference in market responses to positive and negative price shocks accompanied by new information when there is a news story about a firm positive price shocks are followed by reversal while negative ones result in drift this is interpreted as the stock market overreaction to good news and underreaction to bad news these seemingly contradictory results can be explained in a single framework considering the interaction of retail investors with attention bias and arbitrageurs with short run capital constraints consistent with this hypothesis we find that both patterns are stronger when the attention bias is stronger and when the arbitrage capital is scarce

optimal international hedging in commodity and currency forward markets abstract this paper derives optimal hedging and production rules for an exporting firm which faces both commodity price and foreign exchange rate uncertainty the size of the commodity hedge is independent of the properties of the foreign exchange market however the optimal foreign exchange hedge depends on the commodity hedge and the properties of the commodity forward market the firm s production decision is independent of its objective function if both forward markets exist but depends on the consumption beta of the unhedgeable risks in the absence of one or both of the markets

analyzing the impact of futures trading on spot price volatility evidence from the spot electricity market in france and germany abstract this paper examines the impact of the introduction of electricity futures on the spot price volatility of the french powernext and german eex electricity markets as well as the degree of their price correlation over the period 2002 2011 our working hypotheses were tested based on a bivariate vecm garch model the results indicate that the introduction of futures contracts in the french electricity market as well as the launch of the joint futures market in these countries in 2009 has decreased spot price volatility however this effect was not as explicit for the german market due to data specificities other interesting results are the german market dominates and leads the long run price relationship the impact of cooling needs on demand is greater than the impact of heating needs there is a substantial systematic pattern of electricity prices and their respective volatilities during weekdays and holidays overall results are supportive of policy making at the european commission regarding electricity market integration

price dynamics among u s electricity spot markets combining recent advances in causal flows with time series analysis relationships among 11 u s spot market electricity prices are examined results suggest that the relationships among the markets vary by time frame in contemporaneous time the western markets are separated from the eastern markets and the electricity reliability council of texas at longer time frames these separations disappear even though electricity transmission between the regions is limited it appears the relationships among markets are not only a function of physical assets such as transmissions lines among markets but by similar and dissimilar institutional arrangements among the markets

public disclosure private information collection and short term trading abstract this paper examines how public disclosure affects private inforamtion acquisition activity in a market economy we analyze a setting where traders with short term investment horizons are allowed to trade on their private information prior to a public disclosure we demonstrate in this setting that public disclosure stimulates investment in private information acquisition this result is shown to have implications for the magnitude of the pre announcement and announcement price reactions to the disclosure

does hometown advantage matter the case of institutional blockholder monitoring on earnings management in korea this study uses a large sample of korean firms to examine institutional blockholders influence on corporate earnings management the korean market is an interesting setting to study institutional monitoring because it is dominated by chaebols which are characterized by ineffective internal governance mechanisms we find evidence that institutional blockholders deter opportunistic financial reporting and such activities are the most evident among domestic institutional blockholders foreign institutional blockholders especially those with short term investment objectives lead to more discretionary reporting our findings are robust to various empirical models and endogeneity checks moreover this study offers new insight into the proximity advantage of domestic institutional investors with regard to monitoring information it also highlights institutional investors roles in shaping corporate governance in emerging markets in which sound corporate governance has become increasingly important for firms long term sustainability one important policy implication is that regulatory authorities should aim to promote institutional investors participation in these markets

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

how product innovation in the north may immiserize the south a new look at the ricardian model with a continuum of goods abstract the paper proposes a theoretical model investigating the welfare consequences of technological shocks in a ricardian framework a la dornbush fisher and samuelson 1977 contrary to the existing literature the model incorporates a nonhomothetic demand function whose price and income elasticities are endogenously determined by technology nonhomothetic preferences are modeled as the result of the hierarchical consumption of luxury and necessity goods the nature of technical progress determines the consumption pattern and notably the magnitude of the substitution effect between necessities and luxuries the model is applied to the case of trade between two economies with different development levels it is shown in particular that the developing country can suffer a fall in utility as a result of technical progress in the developed country biased towards luxury goods this configuration depends on the size of the development gap and reflects the fact that southern goods are less attractive the higher the range of goods consumed this result suggests that there is an optimal level of development gap to avoid ldcs being harmed by technical progress in the north

futures market backwardation under risk neutrality j m keynes first introduced the theory of normal backwardation in futures markets in the language of british commodities markets a backwardation is an excess of the spot price over futures prices as is well known keynes suggested that this might be explained as a risk premium less well known is that keynes actually proposed two distinct theories of backwardation of these two theories of backwardation the latter has recently received much attention the purpose of this paper is to formalize keynes first theory his liquid stocks theory with an eye to its eventual empirical test we follow the recent formalizations of the risk premium theory by assuming the existence of perfectly competitive asset markets to emphasize the differences between the two theories however we assume that there are well funded risk neutral investors thus risk premia cannot explain backwardation under our assumptions instead backwardations arise because of interactions between equilibrium in the commodities exchange both in spot and futures trading and the production consumption and storage decisions taken on the real side of the economy

the determination of spot and futures prices with storable commodities this paper analyzes the effects of futures trading in a market for a storable commodity in which producers and speculators are assumed to be risk averse and specifications of the aggregate supply and inventory demand functions are derived from explicit optimization a critical aspect is how the parameters of these functions change with the introduction of the future market as it is through these induced parameter changes that the futures market exerts its influence on the spot price the effects of the futures market on both the long run average spot price and its variance are analyzed while we are unable to draw any definitive conclusions on this issue we find that in all cases considered the futures market stabilizes the spot price as well as lowering its long run mean for many years now the question of the effects of futures trading on the stability of spot prices has been extensively debated this topic has been discussed at various levels for example farmers and agricultural interest groups have claimed that futures trading destabilizes spot prices thereby imposing welfare losses on the economy in the united states congress has decided that futures trading can cause price destabilization and has subjected futures trading to the regulation of the commodity futures trading commission at a more analytical level economists have been investigating the issue both empirically and more recently theoretically as well

some relations between volatility and serial correlations in stock market returns this article explores the relation between serial correlation and volatility for several different stock return series at daily and weekly frequencies it is found that serial correlations are changing over time and are related to stock return volatility an extension to the garch model is proposed and estimated revealing parameters consistent with other findings in this article copyright 1992 by university of chicago press

a direct test of the mixture of distributions hypothesis measuring the daily flow of information this paper proposes and conducts direct tests of the mixture of distributions model for stock prices by exploiting the model s bivariate conditional normality of price changes and trading volume these restrictions can be tested under very weak assumptions regarding the daily flow of information to the market as a technical by product important parameters governing the distribution of this unobservable information flow are estimated

crack spread hedging accounting for time varying volatility spillovers in the energy futures markets crude oil heating oil and unleaded gasoline futures contracts are simultaneously analysed for their effectiveness in reducing price volatility for an energy trader a conceptual model is developed for a trader hedging the crack spread various hedge ratio estimation techniques are compared to a multivariate garch model that directly incorporates the time to maturity effect often found in futures markets modelling of the time variation in hedge ratios via the multivariate garch methodology and thus taking into account volatility spillovers between markets is shown to result in significant reductions in uncertainty even while accounting for trading costs copyright 2002 john wiley sons ltd

speculative intensity and spot and futures price variability this paper develops a simultaneous stochastic rational expectations model of futures and spot price determination using the model we find that increases in what we term speculative intensity increase spot price variability arising from storage cost shocks but decrease spot price variability arising from demand shocks in contrast increases in speculative intensity unambiguously decrease futures price variability regardless of the underlying source of disturbances we are able to develop these comparative static results because the model has a unique equilibrium

endogenous trading volume and momentum in stock return volatility this article examines the ability of volume data to shed light on the source of persistence in stock return volatility a mixture model in which a latent common factor restricts the joint density of volume and returns is used to relax the assumption of exogenous volume used in previous studies we use a point in time signal extraction procedure to identify this latent process and a calibrated simulation to conduct analysis of the viability of the model to explain important properties of the data using daily returns and volume on individual stocks our procedure cannot accommodate serial dependence in squared returns

market integration among electricity markets and their major fuel source markets dynamic price information flows among u s electricity wholesale spot prices and the prices of the major electricity generation fuel sources natural gas uranium coal and crude oil are studied multivariate time series methods applied to weekly price data show that in contemporaneous time peak electricity prices move natural gas prices which in turn influence crude oil in the long run price is discovered in the fuel sources market except uranium as these prices are weakly exogenous in a reduced rank regression representation of these energy prices

futures markets price stabilization and efficient exploitation of exhaustible resources markets for natural resource futures contracts and cash forward contracts experience a rapid growth according to theory this should result in more efficient resource depletion implying that price formation is more consistent with hotelling s rule the rationale of this stabilization effect is briefly discussed next we analyze the impact of expanding futures markets on the behaviour of individual resource owners trading on the cash market using a simple pulse extraction model we demonstrate that the expected time of depletion can shift to the present or the future and that utility of exploitation can go up or down as market prices are stabilized

on the measurement of product variety in trade product variety plays an important role in the theoretical work on monopolistic competition and trade and recent empirical work has begun to quantify this for aggregate and disaggregate import demands the authors discuss the measurement of product variety in trade using a broad cross section of industrial and developing countries and disaggregating across sectors the authors calculate the export variety of countries in their sales to the united states and relate the export variety indexes to country productivities they confirm that countries with greater product variety in exports also have higher productivity this may be due to their development of and access to these products

does stronger patent protection increase export variety evidence from us product level data proponents of global intellectual property rights iprs reforms have argued that developing countries weak iprs limit their access to foreign innovative products and technologies central to our understanding of the effects of iprs on product access is the influence of national differences in patent protection on corporate behavior and business strategy of multinational firms using detailed product data on us exports from 1990 to 2000 this research note assesses the impact of strengthening iprs in developing countries on product variety of us exports colonial origin and cross industry variation in patent effectiveness serve to identify the impact the results show that the strengthening of iprs increased exports of new products in patent sensitive industries the expansion in product variety accounted for the entire increase in us exports the findings substantiate claims that ratification of trips by developing countries promotes access to new foreign products and technologies additionally the results demonstrate that patent protection is a significant institutional factor in us firms business decisions over the introduction of new products and processes into a developing country marketplace

speculative commodity holdings abstract adopting a mean variance approach we characterize the optimal commodity holdings for a risk averse speculator within a discrete time framework a new factor namely covariance risk effect arises which essentially represents the difference between the optimal stock of a risk averse speculator and that of a risk neutral one

a rational expectations model of time varying risk premia in commodities futures markets theory and evidence the intertemporal hedging theory is used to model the role of spot price risk measured by the variance in futures market risk premia the model gives a theoretical basis for treating the variance as serially correlated when commodities are storable t he rational expectations hypothesis implies that agents use the varianc e process to predict risk therefore the expected variance should be incorporated in equilibrium risk premia tests on data from four commodity markets show that variances do have predictable components however premia are related to expected variances in only one market copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

does futures trading increase stock market volatility 1988 does futures trading increase stock market volatility financial analysts journal vol 44 no 1 pp 63 69

derivative securities and cash market stability this study investigates the effect of introducing interest rate futures and options on the price variances in related financial cash markets standard research approaches to this issue relate cash price stability before the introduction of futures and options trading to cash price stability after trading in the derivative security begins however controlling for the additional factors that may also effect cash markets is difficult the approach employed here to deal with this obstacle is motivated by recent theoretical research relating cash and futures markets but hitherto not operationalized to empirically test for a relationship between the markets varying parameter models of 1 the demand for short term treasury securities 2 the demand for large time deposits and 3 the supply of large time deposits are specified such that changes in the parameters imply changes in the volatility of the cash price these parameters are modelled as functions of the trading volume of interest rate futures and o

delivery uncertainty and the efficiency of futures markets this paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets examining soybean futures contracts we show that delivery basis risk has important implications for market efficiency tests as suming no delivery basis risk the market efficiency hypothesis is rejected however fu tures prices contain signiflcant time varying expected delivery basis and time varying ex pected delivery risk premiums once these expected delivery basis and delivery risk premiums are accounted for the apparent inefficiency is eliminated equilibrium spot prices also contain signiflcant time varying expected delivery risk premiums

informed trading before positive vs negative earnings surprises abstract this paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises using korean data over the period of 2001 2010 we find that information asymmetry is larger before negative earnings surprises earnings shock among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry we also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news finally we find that institutional trade imbalance is positively related to the post announcement abnormal returns of negative events this study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements

the price forecasting performance of futures markets for live cattle and hogs a disaggregated analysis four hypotheses about the price forecasting performance of live cattle and hog futures are tested using disaggregated data live cattle futures are found to have inadequate forecasting performance for each hypothesis and do not provide better forecasts than lagged cash prices live hog futures perform well for three hypotheses but not when economic conditions are unstable hog futures provide better forecasts than lagged cash prices the analysis does not support the contention that these futures markets are agencies for rational price formation

an analysis of the implications for stock and futures price volatility of program trading and dynamic hedging strategies the notion that a real security is redundant when it can be synthesized by a dynamic trading strategy ignores the informati onal role of real securities markets portfolio insurance uses a dyna mic strategy to synthesize a european put the absence of trading in an appropriate real put option prevents the transmittal of informatio n to market participants about the future price volatility associated with current dynamic hedging strategies less information is transmi tted to potential liquidity providers it will therefore be more di fficult for the market to absorb the trades implied by the dynamic he dging strategies and the stocks future price volatility will rise copyright 1988 by the university of chicago

futures market efficiency in the soybean complex 13 1 rev division of agricultural sciences university of ifornla working paper no 139 r i j futures market efficiency in the soybean complex gordon c rausser and colin carter giannini foundation of agricultural economics l ibraili v im california agric u l tural elqieriment station giannini foundation of agricultural economics march 1982

parameter based decision making under estimation risk an application to futures trading this study shows how the standard portfolio model of futures trading should be modified when there is less than perfect information about the relevant parameters estimation risk the standard and the optimal decision rules for futures trading in the presence of estimation risk are compared and discussed an operational model of futures trading for use under estimation risk is advanced in the presence of relevant prior and sample information the model can be used to optimally blend both types of information many of the contributions of economic theory to the study of financial markets involve the use of parameters that are assumed known or estimable by the economic agents examples include the risk premium coefficient 18 and the security market lines that underlie the capital asset pricing model the volatility measures required for option pricing and the minimum variance hedge ratio and expected basis used to construct portfolios of futures contracts and cash positions generally it is left to practitioners to provide estimates of these parameters which are then directly substituted for the actual parameter values of the theoretical model whenever textbooks demonstrate how these parameters can be estimated there is usually a cookbook formula provided that requires some relatively straightforward analysis of the relevant data e g marshall 1989 chapters 6 and 7 cox and rubinstein 1985 chapter 6 the problems with the procedure described above are twofold first the theory has been slow to acknowledge that the practical application of the model almost always involves parameter estimates generally the additional risk of not knowing the true parameters is completely neglected second practitioners or the market participants will often have some type of nonsample information such as insider information or subjective priors that seems relevant for decision making however this potentially important information is ignored altogether when only sample data are used to obtain the parameter estimates

pricing efficiency in the live cattle futures market further interpretation and measurement the pricing efficiency of the live cattle futures market is evaluated using out of sample forecasts from an econometric model an arima model and composite forecasting procedures in terms of the mean squared error criterion a necessary condition for market efficiency at least one of the models and frequently more forecasted more accurately than did the futures market however market simulation results based on the most accurate forecasts generated large risk return ratios these results do not show strong evidence of inefficiency and call into question the use of only mean squared errors to examine a market s pricing efficiency

can speculative trading explain the volume volatility relation we derive a speculative trading model with endogenous informed trading that yields a conditionally heteroscedastic time series for trading volume and the squared price changes we use half hourly price change and volume data for ibm during 1988 to test the model and estimate the structural parameters using the simulated method of moments estimation procedure although the model seems to do a reasonable job fitting the unconditional moments of the volume and the squared price change processes it fares less well in fitting the relation between current trading volume and lags of trading volume and squared volume s and its lag s relation to squared price changes

spot and forward rates in a stochastic model of the foreign exchange market abstract in this paper we develop a simultaneous stochastic model of spot and forward exchange rate determination under rational expectations for spot rates we find that increases in speculative responsiveness dampen the effects of trade balance shocks but exacerbate effects of interest rate shocks for forward rates though increases in speculative responsiveness dampen the effects of both trade balance and interest rate shocks the bias of the forward forecast error decreases as specualtive responsiveness increases but the expected squared error may increase

financial innovations and the interest elasticity of money demand some historical evidence note 1 lntroduction a number of investigations into the difficulties of estimating short run money demand functions recently have suggested that the trouble is linked to changes in the financial market e g see garcia and pak 1979 goldfeld 1976 and simpson and porter 1980 it is argued that these financial innovations have led to a deterioration in the marginal relationship between real money balances and interest rates arguments that financial innovations affect the link between interest rates and money demand are not new indeed this contention is the cornerstone of the much debated theories of gurley and shaw 1960 where a proliferation of money substitutes is hypothesized to increase the interest elasticity of money demand the consequence is a lessening of the fed s ability to affect economic conditions through open market operations since the most dramatic changes in the payments mechanism have occurred during the past twenty years the interest elasticities estimated from recent data should be larger relative to earlier sample period estimates l this finding would support the gurley shaw hypothesis and buttress recent claims that financial innovations have produced a much more interest elastic money demand function unfortunately little empirical work has been done to specifically examine the temporal nature of money demand s interest elasticity the purpose of this paper therefore is to provide empirical evidence on this question 2 we compare the shortand longrun interest elasticities from a money demand equation estimated across the l915 i 1979 iv period 3 our results indicate that the interest elasticity of money

aggregate demand and interest rates a macroeconomic approach to the term structure this paper develops a model in which the term structure of interest rates obtains as an equilibrium outcome of the interactions of firms households and rationally informed speculators exogenous disturbances whose impact effects fall only in the market for short term bonds generate equilibrium movements in the yield on long term bonds and the level of investment spending in the case of risk averse speculators a purely transitory unanticipated shock to the money supply generates a long distributed lag effect on the level of aggregate demand

futures trading and volatility in the gnma market futures markets for agricultural commodities have existed for well over 100 years recently there has been a major expansion of futures trading into nontraditional areas particularly interest bearing securities and foreign currenciesthe so called financial futures the introduction of exchange traded futures contracts for treasury bills gnma pass through certificates and other securities has created new hedging arbitrage and speculative opportunities for the investors issuers and dealers who are active in the cash markets for these securities futures trading has also opened these markets to participation by new classes of traders particularly private and smaller institutional investors through the process of arbitrage a financial futures market will be closely linked to the cash market for the underlying securities an important concern of the regulatory authorities is what effect opening a futures market is likely to have on an existing cash market the purpose of this paper is to analyze the impact of futures trading in government national mortgage association gnma passthrough certificates on price volatility in the cash market for these securities there are several major ways in which opening futures trading can increase efficiency and smooth price variations in a cash market most importantly futures provide a mechanism for those who buy and sell the actual security or commodity to hedge themselves against unfavorable price changes through the futures market risk can be spread across a large number of investors and transferred away from those hedging spot positions to professional speculators who are more willing and able to bear it this risk transfer may substantially improve the functioning of the spot market because it reduces the need to incorporate risk premia in cash market transactions to compensate for the risk of price fluctuations second futures market may increase the informational efficiency of a cash market since futures prices are determined in a unified highly visible market by traders who specialize in gathering and evaluating information the futures market is expected to be an efficient market in the sense that prices will reflect the best estimate of true future values given the information currently available if anything an informationally efficient futures market should lead to more efficient pricing in the cash market the importance of both of these effects will depend upon the structure of the existing cash market the more developed and integrated is the cash market the

an examination of the necessary and sufjicient conditions for market eflciency the case of hogs the pricing efficiency of the live hog futures market is examined utilizing both necessary and sufficient conditions out of sample forecasts from an econometric model an arima model and a composite forecasting model are compared with the forward prices of the futures market within a mean squared error framework at least one model and frequently all of them forecast more accurately than the futures market a necessary condition for market efficiency the sufficient condition is assessed using simulated market trading strategies based o n the most accurate model forecasts results suggest that informational inefficiencies exist in the live hog futures market

how informed are actively trading institutional investors evidence from their trading behavior before a break in a string of consecutive earnings increases we examine whether transient institutional investors i e institutions that trade actively to maximize short term profits have information that allows them to predict a break in a string of consecutive quarterly earnings increases and thereby avoid the economically significant negative stock price response associated with the break announcement we show that transient institutions predict the break at least one quarter in advance of the break quarter we also provide evidence that is consistent with transient institutions obtaining information regarding the impending break from private communications with management

transmission of prices and price volatility in australian electricity spot markets a multivariate garch analysis this paper examines the transmission of spot electricity prices and price volatility among the five regional electricity markets in the australian national electricity market namely new south wales queensland south australia the snowy mountains hydroelectric scheme and victoria a multivariate generalised autoregressive conditional heteroskedasticity model is used to identify the source and magnitude of price and price volatility spillovers the results indicate the presence of positive own mean spillovers in only a small number of markets and no mean spillovers between any of the markets this appears to be directly related to the physical transfer limitations of the present system of regional interconnection nevertheless the large number of significant own volatility and cross volatility spillovers in all five markets indicates the presence of strong autoregressive conditional heteroskedasticity and generalised autoregressive conditional heteroskedasticity effects this indicates that shocks in some markets will affect price volatility in others finally and contrary to evidence from studies in north american electricity markets the results also indicate that australian electricity spot prices are stationary

the impact of the listing of options in the foreign exchange market abstract this paper documents the impact of the introduction of foreign currency options and options on foreign currency futures on the underlying securities we find that the volatility of exchange rates decreases following the listing of options for a majority of the currencies under consideration in addition we find that trading volume and open interest in currency futures increases after option introduction this evidence is consistent with the notion that derivative securities are important innovations for stabilizing and increasing liquidity in the market for the underlying assets

the economic role of commodity storage one of the earliest and most successful exainples of economic policy is the oftquoted biblical account of joseph s interpretation of the pharoah s dream joseph foretold that seven years of abundant harvests would precede seven years of drought and recommended that the pharoah accumulate grain during the good years since that time the central role of storage in stabilising the economy in the face of exogenous disturbances has been obvious but our understanding of the nature of that role has not greatly advanced without divine assistance in forecasting stochastic production the storage decision is considerably more complex than the one joseph faced and the role of storage quite different in fact several commonly held impressions about the role of storage of commodities such as grains are incorrect rather than stabilising production storage actually accentuates its variability rather than causing a mean price preserving decrease or a mean output preserving decrease in the dispersion of price storage generally causes a more complex modification of the distribution of price rather than being most effective at eliminating short falls in consumption storage actually is more effective at eliminating the incidence of exceedingly high consumption in this paper we explore the role of storage in a model where production is stochastic and both production and storage are performed by competitive profitmaximisers who form rational expectations about the returns to their activities we derive the subtle but very important interactions among production price expectations and storage which simpler models cannot capture finally we make a comparative statics assessment of the distributional implications of storage these results while confirming the importance of the specification of the demand function and the supply elasticity identified in recent analytical studies e g wright i979 and newbery and stiglitz i979 are surprisingly favourable to consumers considering the asymmetric nature of the effects of storage on consumption and price storage is simply a productive activity one that transfers a commodity from one period to the next like other forms of production it is costly the total cost of storing an amount st from period t to period t i is as of period t i

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

the impact of energy derivatives on the crude oil market we examine the effects of energy derivatives trading on the crude oil market there is a common public and regulatory perception that derivative securities increase volatility and can have a destabilizing effect on the underlying market consistent with this view we find an abnormal increase in volatility for three consecutive weeks following the introduction of nymex crude oil futures while there is also evidence of a longer term volatility increase this is likely due to exogenous factors such as the continuing deregulation of the energy markets subsequent introductions of crude oil options and derivatives on other energy commodities have no effect on crude oil volatility we also examine the effects of derivatives trading on the depth and liquidity of the crude oil market this analysis reveals a strong inverse relation between the open interest in crude oil futures and spot market volatility specifically when open interest is greater the volatility shock associated with a given unexpected increase in volume is much smaller

regime jumps in electricity prices many countries are liberalizing their energy markets participants in these markets are exposed to market risk due to the characteristics of electricity price dynamics electricity prices are known to be mean reverting very volatile and subject to frequent spikes models that describe the dynamics of electricity prices should incorporate these characteristics in order to capture the price spikes many researchers have introduced stochastic jump processes but we argue and show that this specification might lead to potential problems with specifying the true amount of mean reversion within the process in this paper we propose a regime switching model that models price spikes separated from normal mean reverting prices

does renewable energy generation decrease the volatility of electricity prices an analysis of denmark and germany although variable renewable energy vre technologies with zero marginal costs decrease electricity prices the literature is inconclusive about how the resulting shift in the supply curves impacts price volatility because the flexibility to respond to high peak and low off peak prices is crucial for demand response applications and may compensate for the losses of conventional generators caused by lower average prices there is a need to understand how the penetration of vre affects volatility in this paper we build distributed lag models with danish and german data to estimate the impact of vre generation on electricity price volatility we find that in denmark wind power decreases the daily volatility of prices by flattening the hourly price profile but in germany it increases the volatility because it has a stronger impact on off peak prices our analysis suggests that access to flexible generation capacity and wind power generation patterns contribute to these differing impacts meanwhile solar power decreases price volatility in germany by contrast the weekly volatility of prices increases in both areas due to the intermittency of vre thus policy measures for facilitating the integration of vre should be tailored to such region specific patterns

integration and shock transmissions across european electricity forward markets abstract new results are presented relating to the integration of the french german british dutch and spanish power markets at day ahead week ahead one month ahead and two month ahead lead times overall there is evidence of market integration increasing over time despite an underlying inefficiency in each market with respect to the forward and spot price convergence the spatial analysis on a financial dimension is undertaken using causality tests cointegration and impulse response techniques for both price levels and volatilities in general we find less influence of the size and proximity of neighbouring markets than other studies more integration at baseload than peak and surprisingly less integration in forwards than spot prices

intra industry trade in intermediate products pollution and internationally increasing returns this paper examines the relationship between intra industry trade in intermediate products pollution and increasing returns we develop a two country model in which production occurs in two stages final and intermediate good production intermediate goods are produced under monopolistic competition and final good production exhibits increasing returns with respect to the number of varieties of intermediates pollution occurs in the production of the final good when polluting intermediates are used we analyze the effects of international trade in intermediate products on pollution output and welfare under an endogenous tax scenario and with two types of pollution functions the results show that because of increasing returns international trade either leads to lower total pollution in each country or lower pollution per unit of output in at least one country in addition intra industry trade causes countries to import the environmental quality of their trading partners

quasi rational and ex ante price expectations in commodity supply models an empirical analysis of the us broiler market a statistically optimal inference about agents ex ante price expectations within the us broiler market is derived using futures prices of related commodities along with a quasi rational forecasting regression equation the modelling approach which builds on a hamilton type framework includes endogenous production and allows expected cash price to be decomposed into anticipated and unanticipated components we therefore infer the relative importance of various informational sources in expectation formation results show that in addition to the quasi rational forecast the true supply shock future prices and ex post commodity price forecast errors have at times been influential in broiler producers price expectations copyright 2003 john wiley sons ltd

does aid for trade diversify the export structure of recipient countries the importance of aid for trade as a tool for facilitating trade economic growth and social development has received attention since the concept was introduced in 2005 while one of the main targets of aid for trade is export diversification reflecting the fact that the exports of many developing countries are concentrated in a small range of items there have not been many efforts to measure the effect of aid for trade on export structure this study therefore attempts to trace the relationship between aid for trade and 133 aid recipients export structure between 1996 and 2013 using the herfindahl hirschman index to measure the degree of export concentration the findings suggest that total aid for trade has reduced the concentration level in the short run in the long run on the other hand aid for trade has had no significant effect on export structure of recipient countries only aid for building productive capacity which is one of the three categories of aid for trade contributes to lower concentration yet this change is not caused by an increase in export diversity but by the redistribution of shares of existing products of a similar sophistication level

speculative storage futures markets and the stability of commodity prices a theoretical dynamic model is developed that integrates the micro behavior of commodity and futures speculators into the simultaneous determination of cash and futures prices in a storable commodity market the model is used to demonstrate the way in which the introduction of a futures market by affecting the decisions of speculative inventory holders alters the distribution of spot prices and to elucidate the conditions that render futures trading stabilizing for cash prices

the impact of financial futures on the cash market for treasury bills this paper is concerned with the effect of futures trading in treasury bills on the volatility of yields in the cash market it is found that futures trading led to a decrease in volatility initially but the effect disappeared when futures volume became large and possibly resulted in increased volatility in the secondary cash market the results also indicated that the deliverable bill appears to sell at a small premium relative to the adjacent maturities prior to the delivery date

multimarket trading and market liquidity when a security trades at multiple locations simultaneously an informed trader has several avenues in which to exploit his private information the greater the proportion of liquidity trading by large traders who can split their trades across markets the larger is the correlation between volume in different markets and the smaller is the informativeness of prices we show that one of the markets emerges as the dominant location for trading in that security when informed traders can use their information for more than one trading period the timely release of price information by market makers at one location adversely affects the profits informed traders expect to make subsequently at other locations market makers competing to offer the lowest cost of trading at their location consequently deter informed trading be voluntarily making the price information public and by cracking down on insider trading article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real exchange rates and productivity evidence from asia this paper examines a productivity based explanation of the long run real exchange rate movements of six asian economies using industry level data we construct total factor productivities tfps for the tradable and nontradable sectors we find that a within each country the relative price of nontradable goods is cointegrated with the sectoral tfp differential and b the real exchange rates are cointegrated with the home and foreign sectoral tfp differentials using the predicted real exchange rate as a measure of the long run equilibrium we find that most asian economies real exchange rates are overvalued before the asian financial crisis

forecast encompassing as the necessary condition to reject futures market efficiency fluid milk futures the traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market here a more exacting requirement for futures market efficiency is proposed forecast encompassing using the procedure of harvey and newbold multiple forecast encompassing is tested using chicago mercantile exchange fluid milk futures time series models and usda experts provide competing forecasts results suggest milk futures do not encompass the information contained in the usda forecasts at a two quarter horizon while the competing forecasts generate positive revenues it is unlikely that returns exceed transaction costs in this relatively new market

the effect of futures markets and corners on storage and spot price variability when a futures market is introduced the volume of storage should become more sensitive to changes in the return to storage the increase in storage sensitivity means that storage will absorb a larger proportion of demand and supply shocks than it did previously reducing spot price volatility data from the chicago board of trade support the hypotheses of increased storage sensitivity and reduced spot price volatility the effect of futures on spot price volatility is sensitive to the competitive structure of the futures market futures market manipulation causes spot price variance to increase despite manipulation the development of the wheat futures market caused the coefficient of variation of spot price to decline significantly

the price variability volume relationship on speculative markets this paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets our work extends the theory of speculative markets in two ways first we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day and second we determine how this joint distribution changes as more traders enter or exit from the market the model s parameters are estimated by fiml using daily data from the 90 day t bills futures market the results of the estimation can reconcile a conflict between the price variability volume relationship for this market and the relationship obtained by previous investigators for other speculative markets this paper concerns the relationship between the variability of the daily price change and the volume of trading on speculative markets previous empirical studies 2 3 6 12 14 16 of both futures and equity markets always find a positive association between price variability as measured by the squared price change ap2 and the trading volume 2 there are two explanations for the relationship clark s 2 explanation which is secondary to his effort to explain why the probability distribution of the daily price change is leptokurtic emphasizes randomness in the number of within day transactions in clark s model the daily price change is the sum of a random number of within day price changes the variance of the daily price change is thus a random variable with a mean proportional to the mean number of daily transactions clark argues that the trading volume is related positively to the number of within day transactions and so the trading volume is related positively to the variability of the price change the second explanation is due to epps and epps 6 their model examines the mechanics of within day trading the change in the market price on each within day transaction or market clearing is the average of the changes in all of the traders reservation prices epps and epps assume there is a positive relationship between the extent to which traders disagree when they revise their reservation prices and the absolute value of the change in the market price that is an increase in the extent to which traders disagree is associated with a larger absolute price change the price variability volume relationship arises then because the volume of trading is positively related to the extent to which traders disagree when they revise their reservation prices

heteroskedasticity in stock return data volume versus garch effects this paper provides empirical support for the notion that autoregressive conditional heterqskedasticity arch in daily stock return data reflects time dependence in the process generating information flow to the market daily trading volume used as a proxy for information arrival time is shown to have significant explanatory power regarding the variance of daily returns which is an implication of the assumption that daily returns are subordinated to intraday equilibrium returns furthermore arch effects tend to disappear when volume is included in the variance equation the autoregressive conditiqnal heteroskedasticity arch process of engle 1982 has been shown to provide a good fit for many financial return time series 1 arch imposes an autoregressive structure on conditional variance allqwing volatility shocks to persist over time this persistence captures the propensity of returns of like magnitude to clu ter in time and can explain the well documented nonnormality and nonstability of empirical asset return distributions see especially fama 1965 an appealing explanation for the presence of arch is based upon the hypothesis that daily returns are generated by a maiture of distributions in which the rate of daily information arrival is the stochastic mixing variable as suggested by diebold 1986 gallant hsieh and tauchen 1988 and stock 1987 1988 arch might capture the time series properties e g serial correlation of this mixing variable hqwever this linkage has not been broadly documented with the datia the objective of this study is to examine the validity of this explanation for daily stock returns the empirical strategy exploits the implication of the mixture model that the variance of daily price increments is heteroskedastic specifically positively related to the rate of daily information arrival using daily trading volume as a proxy for the mixing variable we show that for a sample of 20 common stocks arch effects vanish when volume is included as an explanatory variable in the conditional variance equation

time varying risk premium further evidence in agricultural futures markets research has provided mixed results regarding the presence of a time varying risk premium in agricultural futures markets in this article we test for the presence of a time varying risk premium focusing on the properties of the underlying data our results show that accounting for the structural break in the 1970s plays a key role in the findings in contrast to recent research we find only limited evidence of time varying risk premium for a two month horizon the corn soybean meal and hog markets show no signs of a risk premium while very weak support for a time varying premium emerges in live cattle for the four month horizon no evidence of a time varying risk premium appears for any of the markets