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Article
Publication date: 30 November 2003

A Comparative Analysis of Informational Efficiency of KOSDAQ50 and KOSPI200 Index Futures

Bae Gi Hong and Su Jae Jang

This paper examines the information efficiency of KOSDAQ50 and KOSPI200 index futures markets. The study analyzes and compares both markets in three respects : 1) price…

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Abstract

This paper examines the information efficiency of KOSDAQ50 and KOSPI200 index futures markets. The study analyzes and compares both markets in three respects : 1) price discovery (lead-lag relationship between spot and futures markets.), 2) volatility-volume relationship, and 3) mispricings between spot and futures prices. The first, analysis shows the in the KOSPI200 market, futures price leads spot price. While spot price leads futures price in the KOSDAQ50 market. The second analysis shows that the volatility-volume relation is positive in the KOSPI200 futures market, supporting the hypothesis of mixture of distribution. In contrast, there is little relation between volume and volatility in the KOSDAQ50 futures market. This result casts doubt that the futures market price reflects information. The last analysis shows that the magnitude of mispricing becomes smaller with more volume in the KOSPI200 futures market, while it becomes larger with more volume in the KOSDAQ50 futures market. The overall results imply that the KOSDAQ50 futures market is less informationally efficient that the KOSPI200 market. The inefficiency appears due to the lack of institutional investor participation, especially securities firms, in making up the market.

Details

Journal of Derivatives and Quantitative Studies, vol. 11 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/JDQS-02-2003-B0002
ISSN: 2713-6647

Keywords

  • Price Discovery Volatility-Volume Relationship
  • Mispricing
  • Informational Efficiency

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Article
Publication date: 1 March 1991

Property Futures

Andrew Baum

Discusses the attractions of property to institutional investors.Describes the evolution of future markets from forward contracts incommodity markets and financial and…

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Abstract

Discusses the attractions of property to institutional investors. Describes the evolution of future markets from forward contracts in commodity markets and financial and stock market index futures to the current UK proposal for property index futures. Concludes that property professionals should make every effort to understand and develop the proposed market in a way which will benefit property investors most effectively.

Details

Journal of Property Valuation and Investment, vol. 9 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/14635789110030949
ISSN: 0960-2712

Keywords

  • Interest rates
  • Investment property
  • Futures markets
  • Property
  • Stock markets
  • Valuation

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Article
Publication date: 20 April 2010

Price discovery and convergence in the Indian commodities market

Vishwanathan Iyer and Archana Pillai

The purpose of this paper is to examine whether futures markets play a dominant role in the price discovery process. The rate of convergence of information from one market…

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Abstract

Purpose

The purpose of this paper is to examine whether futures markets play a dominant role in the price discovery process. The rate of convergence of information from one market to another is analyzed to infer the efficiency of futures as an effective hedging tool.

Design/methodology/approach

The paper uses a two‐regime threshold vector autoregression (TVAR) and a two‐regime threshold autoregression for six commodities. The regimes (or states) are defined around the expiration week of the futures contract.

Findings

This paper finds evidence for price discovery process happening in the futures market in five out of six commodities. However, the rate of convergence of information is slow, particularly in the non‐expiration weeks. For copper, gold and silver, the rate of convergence is almost instantaneous during the expiration week of the futures contract affirming the utility of futures contracts as an effective hedging tool. In case of chickpeas, nickel and rubber the convergence worsens during the expiration week indicating the non‐usability of futures contract for hedging.

Originality/value

This paper extends the framework developed by Garbade et al. by superimposing a two‐regime TVAR model to quantify the price discovery process. It is the first paper to analyze the differential impact of price discovery and convergence during expiration week (compared to non‐expiration weeks) for the Indian commodities market.

Details

Indian Growth and Development Review, vol. 3 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/17538251011035873
ISSN: 1753-8254

Keywords

  • Prices
  • Economic convergence
  • India
  • Commodity markets
  • Futures markets

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Article
Publication date: 1 February 1994

Price Discovery in Asset Markets

Jerome L. Stein

Holbrook Working (1949) discovered that the percentage change in futures prices seemed to be largelyrandom. This led Paul Samuelson (1965) to develop the Efficient Market…

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Abstract

Holbrook Working (1949) discovered that the percentage change in futures prices seemed to be largelyrandom. This led Paul Samuelson (1965) to develop the Efficient Market Hypothesis (EMH) which claims that the current spot and futures1 prices fully reflect all relevant information. Furthermore, because the future flow of information cannot be anticipated, price changes will not be serially correlated. These papers linked the notion of randomness of price changes to informational efficiency. From that point on, a major part of the empirical studies of asset markets has been the application of time series analysis to asset prices, in order to evaluate whether the price changes are random and whether futures prices reflect all available information. As the statistical tests became more sophisticated, the number of empirical studies increased and the results became more contradictory and difficult to interpret. An economic theorist can only be bemused by contemplating the empirical/econometric studies in the finance literature.

Details

Managerial Finance, vol. 20 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/eb018465
ISSN: 0307-4358

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Article
Publication date: 14 August 2009

Detecting risk transmission from futures to spot markets without data stationarity: Evidence from Turkey's markets

Alper Ozun and Erman Erbaykal

The purpose of this paper is to analyze cointegration and causality relationships between spot and futures markets in Turkish foreign‐exchange markets.

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Abstract

Purpose

The purpose of this paper is to analyze cointegration and causality relationships between spot and futures markets in Turkish foreign‐exchange markets.

Design/methodology/approach

The research employs Bounds cointegration test and Toda‐Yamamoto causality test to detect a possible risk transmission between spot and futures markets. Time series of Turkish spot and futures foreign‐exchange markets from January 2, 2006 to March 25, 2008 on a daily basis are used for empirical analysis.

Findings

The empirical tests suggest that there is unidirectional causality running from future exchange‐rate market to spot market implying that foreign‐exchange markets have informational efficiency in Turkey.

Originality/value

The paper has originality in both employing Bounds test and Toda‐Yamamoto test to examine the relationship between spots and derivative markets, and in being one of the first empirical papers examining Turkish futures markets. In addition, the paper presents a guide on how Bounds and Toda‐Yamamoto tests can be applied to detect interactions among markets without data stationarity.

Details

The Journal of Risk Finance, vol. 10 no. 4
Type: Research Article
DOI: https://doi.org/10.1108/15265940910980669
ISSN: 1526-5943

Keywords

  • Futures markets
  • Emerging markets
  • Foreign exchange
  • Risk analysis
  • Turkey

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Book part
Publication date: 16 August 2014

The Leading Role of the Chinese Futures in the World Commodity Futures Markets

Hung-Gay Fung, Yiuman Tse, Jot Yau and Lin Zhao

This study explores the price linkage between the Chinese commodity futures market and other dominant futures markets, and examines the forces behind the price linkages…

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Abstract

This study explores the price linkage between the Chinese commodity futures market and other dominant futures markets, and examines the forces behind the price linkages. The contribution by the trading hour innovations in the United States (or United Kingdom) market to the overnight price changes in the Chinese market is larger in scale than the contribution by the daytime information from the Chinese market to the overnight returns of the corresponding US (or UK) market. Several futures have significant interactions of the domestic and foreign factors in the price linkages while the Chinese domestic factors explain better the global market price linkage in some futures (aluminum, gold, and corn), demonstrating the leading role of the Chinese futures markets in these world markets.

Details

International Financial Markets
Type: Book
DOI: https://doi.org/10.1108/S1574-8715(2013)0000013007
ISBN: 978-1-78190-312-4

Keywords

  • Price linkage
  • price discovery
  • Chinese commodity futures

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Article
Publication date: 4 December 2019

Does Ban on Futures trading (de)stabilise spot volatility?: Evidence from Indian Agriculture Commodity Market

Neharika Sobti

The purpose of this paper is to ascertain the possible consequences of ban on futures trading of agriculture commodities in India by examining three critical issues…

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Abstract

Purpose

The purpose of this paper is to ascertain the possible consequences of ban on futures trading of agriculture commodities in India by examining three critical issues: first, the author explores whether price discovery dominance changes between futures and spot in the pre-ban and post-relaunch phase both in the long run and short run. Second, the author examines the impact of ban and relaunch of futures trading on its underlying spot volatility for five sample cases of agriculture commodities (Wheat, Sugar, Soya Refined Oil, Rubber and Chana) using both parametric and non-parametric tests. Third, the author revisits the destabilization hypothesis in the light of ban on futures trading by examining the impact of unexpected component of liquidity of futures on spot volatility.

Design/methodology/approach

The author uses widely adopted methodology of co-integration to examine long-run relationship between spot and futures, while the short-run relationship is investigated using vector error correction model (VECM) and Granger causality to test price discovery in the pre-ban and post-relaunch phases. The second objective is explored using a combination of parametric and non-parametric tests such as Welch one-way ANOVA and Kruskal–Wallis test, respectively, to gauge the impact of ban on futures trading on spot volatility along with post hoc tests to investigate pairwise comparison of spot volatility among three phases (pre-ban, ban and post-relaunch) using Dunn Test. In addition, extensive robustness test is undertaken by adopting augmented E-GARCH model to ascertain the impact of ban and relaunch of futures trading on spot volatility. The third objective is investigated using Granger causality test between spot volatility and unexpected component of liquidity of futures estimated using Hodrick and Prescott (HP) filter to re-visit the destabilization hypothesis.

Findings

The author found extensive evidence for the dominance of futures market in the price discovery of agriculture commodities both in the pre-ban and post-relaunch phases in India. The ban on futures trading is found to have a destabilizing impact on spot volatility as evident from the findings of Wheat, Sugar and Rubber. In addition, it is observed that spot volatility was highest during the ban phase as compared to the pre-ban and post-relaunch phases for all four commodities barring Chana. The author found that destabilisation hypothesis holds true during the pre ban phase, while weakening of destabilization hypothesis is observed in the post-relaunch phase as unexpected futures liquidity has no role in driving the spot volatility.

Originality/value

This study is a novel attempt to empirically examine the potential impact of ban and relaunch of futures trading of agriculture commodities on two key market quality dimensions – price discovery and spot volatility. In addition, destabilization hypothesis is revisited to investigate the impact of futures trading on spot volatility during the pre-ban and post-relaunch period.

Details

South Asian Journal of Business Studies, vol. 9 no. 2
Type: Research Article
DOI: https://doi.org/10.1108/SAJBS-07-2018-0084
ISSN: 2398-628X

Keywords

  • Ban
  • Agriculture futures
  • Price discovery
  • Spot volatility
  • Destabilization effect
  • India
  • G14
  • G18
  • Q020

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Article
Publication date: 7 September 2015

Impact of futures trading on volatility of spot market-a case of guar seed

Dinesh Kumar Sharma and Meenakshi Malhotra

Guar Seed crop is ruling the Indian International business mainly due to its application as a drilling fluid in shale energy industry concentrated in the USA. One of the…

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Abstract

Purpose

Guar Seed crop is ruling the Indian International business mainly due to its application as a drilling fluid in shale energy industry concentrated in the USA. One of the allegations against futures market is its possible role in increasing the volatility of underlying physical market prices. Suspension of guar seed futures contract in 2012 at National Commodity Derivatives Exchange of India (NCDEX)-India, has reignited the controversy and raised an alarm bell to peek into obscure world of Indian commodity derivatives market. Against the backdrop of fiasco in guar futures trading, the purpose of this paper is to investigate whether sudden surge in futures trading volume leads to increase in the volatility of spot market prices.

Design/methodology/approach

Guar seed spot returns volatility is modeled as a GARCH (1, 1) process. Futures trading volume and open interest are segregated into expected and unexpected components. The data are analyzed from 2004 to 2011 using Augmented GARCH model to study the contemporaneous relationship between spot volatility and unexpected futures trading activity and Granger Causality test for examining the dynamic relationship between them and ascertaining causality.

Findings

Augmented GARCH model reports positive relationship between unexpected futures trading volume (UTV) and spot returns volatility, and, Granger Causality flows from UTV to spot volatility. Therefore, when the level of futures trading volume increases unexpectedly, the volatility of spot prices increases pointing toward the destabilizing impact of futures trading. However, hedger’s activity, represented by open interest is not seen to have any causal/destabilizing impact on spot price volatility of guar seed.

Practical implications

The study provides empirical evidence to support the concern of regulators, genuine hedgers and other traders about the presence of excessive speculation and market manipulations perpetrated through futures market that is disturbing the underlying physical market instead of strengthening it by aiding in price discovery and risk mitigation.

Originality/value

There are very few studies which have empirically investigated the temporal relation between volume and volatility in Indian agricultural commodity markets. With guar seed as a special case the present study investigates statistically the impact of futures trading on spot price volatility. In light of the findings of the study, the curb imposed on guar seed futures trading in 2012 was justified.

Details

Agricultural Finance Review, vol. 75 no. 3
Type: Research Article
DOI: https://doi.org/10.1108/AFR-03-2014-0005
ISSN: 0002-1466

Keywords

  • Granger Causality
  • Volatility
  • Agricultural commodity markets
  • Augmented GARCH
  • Futures trading
  • Guar seed

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Article
Publication date: 12 March 2018

Do seasonality, break and spillover effects explain commodity price volatility: Evidence from the Indian commodity markets

Debashish Maitra

The purpose of this paper is to understand the volatility in commodity futures and spot markets. The study starts with a few questions: first, the effect of seasonality on…

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Abstract

Purpose

The purpose of this paper is to understand the volatility in commodity futures and spot markets. The study starts with a few questions: first, the effect of seasonality on the volatility is studied. Thereafter, the presence of structural breaks in the variance is identified. At last the seasonality, structural shifts and spillover effects are examined together to find out their effects on volatility.

Design/methodology/approach

The methodology heavily employs econometric tools and techniques. The monthly seasonal dummies are incorporated to identify the effects of seasonality on volatility. Then, the presence of break in volatility is tested by cumulative sum of squares (CUSUM test), followed by generalized autoregressive conditional heteroscedastictity and EGARCH models are measured by including seasonal dummies, break dummies and the residuals of other market in the variance equation to determine spillover effects.

Findings

It is found that the effects of seasonality on volatility cannot be ignored as the effects are significant. The presence of asymmetry is detected in all the commodities. The presence of seasonality and structural breaks in the variance equation are statistically able to reduce the volatility but the magnitude is very negligible with an exception in cumin futures markets. Bi-directional volatility spillover between futures and spot markets is observed in all the commodities and the effect of spillover is more from spot markets to the futures markets.

Research limitations/implications

This study is limited to a few agro commodities which are well traded. This study could have been extended to the other thinly traded commodities. This study has also taken only near month futures contracts as it contains more information but the same could have been studied by taking far month contracts also.

Originality/value

The present study attempted to understand the conjugated effects of seasonality, structural breaks and spillover on volatility of commodity markets which is not apparent in the previous studies. This study has also employed methodological rigor to identify the breaks in the variance equation. In addition to this it has also investigated whether Indian commodity futures markets are informationally more efficient than the spot markets.

Details

Journal of Agribusiness in Developing and Emerging Economies, vol. 8 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/JADEE-04-2015-0019
ISSN: 2044-0839

Keywords

  • Commodity markets
  • Volatility
  • Seasonality
  • Spillover effects
  • Breaks

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Article
Publication date: 31 January 2011

Lead‐lag relationship, volatility asymmetry, and overreaction phenomenon

Chih‐Hsiang Chang, Hsin‐I Cheng, I‐Hsiang Huang and Hsu‐Huei Huang

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

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Abstract

Purpose

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

Design/methodology/approach

The trivariate GJR‐GARCH (1,1) model and event study were employed to investigate volatility asymmetry and overreaction phenomenon, respectively.

Findings

The empirical results show that return volatility reveals the asymmetric phenomenon, and the holding period returns on US index futures from the opening of the US index futures electronic trading to the opening of the Taiwanese stock market are an important reference for investors in the Taiwanese stock market. Additionally, the paper presents an overreaction of the Taiwan Stock Exchange Capitalization Weighted Stock Index to a drastic price rise of E‐min NASDAQ 100 Index futures at the opening of the Taiwanese stock market.

Research limitations/implications

This paper deletes the observations arising from the different national holidays of the USA and Taiwan, to have the same number of observations in both markets, which might contaminate the empirical results.

Practical implications

Investors in the Taiwanese stock market tend to pay more attention to the fluctuations in the share prices of high‐technological companies in the USA.

Originality/value

Most of the previous studies regarding price transmission between the Taiwanese and US stock markets focused mainly on the Taiwanese market reactions to the overnight returns of the US market. This paper enlarges the current field by examining the lead‐lag relationship, the volatility asymmetry, and the overreaction phenomenon between the Taiwanese and US financial markets according to the most updated US stock index information.

Details

Managerial Finance, vol. 37 no. 1
Type: Research Article
DOI: https://doi.org/10.1108/03074351111092148
ISSN: 0307-4358

Keywords

  • United States of America, Taiwan, Stock markets, Stock prices

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