Theory and Evidence of Arbitrage Trading of Equity Futures

2010 ◽  
Vol 18 (4) ◽  
pp. 69-108
Author(s):  
Jin Yoo ◽  
Geun Beom Kim
Keyword(s):  
Stock Market ◽  
Futures Market ◽  
Futures Contracts ◽  
Spot Price ◽  
Market Participants ◽  
Arbitrage Opportunities ◽  
Time Period ◽  
Arbitrage Trading ◽  
Arbitrage Opportunity ◽  
First Time

The equity futures market was opened in May 6th, 2008 for the first time in Korea but nonetheless it has rarely been researched since. In this paper, we examine whether the market, combined with the stock market, its underlying market, has been offering any arbitrage opportunities to market participants for the period of May 6th, 2008 to March 11, 2010, focusing on the two futures contracts of Samsung Electronics and Hyundai Motors, the two most actively traded ones. Our findings are as follows. First, there have been arbitrage opportunities for the two futures in either direction. Second, the average time period for an arbitrage opportunity was two seconds so arbitrage transactions were feasible indeed. Third, nevertheless, some arbitrage transactions ended up with a loss because the estimated spot price at maturity to carry out an arbitrage trading turned out to be significantly different from the realized one. The discrepancy in these two prices causes a seemingly very safe arbitrage trading a risky one. This risky feature of an arbitrage trading has never been addressed in depth in a paper or a book before, and is a major contribution of this paper.

An Empirical Analysis on Change in Price Discovery of KOSPI200 Futures Through Market Maturity Process

2006 ◽  
Vol 14 (2) ◽  
pp. 51-77
Author(s):  
Woo–baik Lee
Keyword(s):  
Error Correction ◽  
Trading Volume ◽  
Price Discovery ◽  
Futures Market ◽  
Spot Price ◽  
Sample Period ◽  
Information Share ◽  
Spot Prices ◽  
Intraday Data ◽  
Arbitrage Opportunity

This paper estimates the contribution of KOSPI200 futures to spot price discovery based on methodology of ‘information share’, which is suggested by Hasbrouck (1995). Using the intraday data covering sample period from year 1997 to 2003, I estimate information share with specification of Vector Error Correction Model. Main empirical findings are summarized as followings; First. estimate of information share is above 60 percent on average through-out the entire sample period. Second. the contribution of KOSPI200 futures to error correction increased during the recent year of sample period. showing that futures price have strong tendency to lead the spot price. Third. price discovery of KOSPI200 futures have significantly positive relationship with program trading volume and seems to increase under contango. These empirical findings explain the ‘market maturity effect’ that role of futures in spot price discovery enhances as cointegration between futures and spot prices strengthens and futures market countervails the arbitrage opportunity. In general. this paper presents that mature futures market Significantly contributes to spot market efficiency and price discovery process.

Test on the Profit of Pairs Trading Strategy Using KOSPI200 Regular and Mini Options

2018 ◽  
Vol 26 (1) ◽  
pp. 115-151
Author(s):  
Woo–baik Lee
Keyword(s):  
The Other ◽  
Sample Period ◽  
Options Market ◽  
Pairs Trading ◽  
Elapsed Time ◽  
High Profit ◽  
Arbitrage Opportunities ◽  
Arbitrage Trading ◽  
Arbitrage Opportunity ◽  
Price Spread

The KOSPI200 mini option introduced in July 2015 is the derivative of which trading multiplier is reduced to one-fifth of the regular options. This study explored the pairs trading opportunities arising from the price spread between the KOSPI200 regular options and the mini options during the sample period from August 2015 to March 2016 and measured the profits of pairs trading. The main results are summarized as follows. First, the most frequency of pairs trading with high profit was observed for in-the-money options. On the other hands, the frequency of pairs trading opportunities is low and the profit is relatively small for out-of (at)-the money options. Second, for in-the-money options, arbitrage opportunities were captured every three minutes on an average, but the elapsed time between arbitrage opportunity opportunities on out-of-the money options exceeded 10 minutes on average. Third, pairs trading opportunities occur uniformly throughout the day, but profit tends to increase in the afternoon than in the morning. This indicates that price efficiency in options market deteriorates and profit of arbitrage trading with price disparity is higher in the afternoon than that of the morning trading. In addition, the profitability of pairs trading with low liquidity was cross-sectionally higher than those with high liquidity.

The Optimal Wheat Futures Hedge at the Euronext Paris from a Farmer’s Perspective

2020 ◽  
Vol 69 (1) ◽  
pp. 49-63
Author(s):  
Teresa Vollmer
Keyword(s):  
Commodity Prices ◽  
Futures Market ◽  
Futures Contracts ◽  
Risk Minimization ◽  
Price Shocks ◽  
Market Participants ◽  
Hedge Ratios ◽  
Optimal Dynamic ◽  
One Year ◽  
The Cost

Futures contracts are extensively used by commer-cial market participants to hedge commodities against the risk of adverse price fluctuations. But although farmers have faced increased volatility in commodity prices in recent years, only very few of them actively use hedging as a risk management instrument. In this article we analyze the hedging potential of the Euronext milling wheat futures market for German farmers based on the estimation of optimal static as well as optimal dynamic hedge ratios. We find that both hedging approximately one year and half a year before harvesting leads to a reduction in the variance of returns compared with unhedged portfolios. But this risk minimization is achieved at the cost of lower returns on average. In addition we find that margin calls might be one of the reasons why so few farmers hedge since they cause liquidity problems especially in marketing years with unanticipated price shocks.

scholarly journals RESEARCH ON FUTURES TREND TRADING STRATEGY BASED ON SHORT TERM CHART PATTERN

2012 ◽  
Vol 13 (5) ◽  
pp. 915-930 ◽  
Author(s):  
Saulius Masteika ◽  
Aleksandras Vytautas Rutkauskas
Keyword(s):  
Historical Data ◽  
Decision Support Tool ◽  
Technical Analysis ◽  
Futures Market ◽  
Trading Strategy ◽  
Futures Contracts ◽  
Main Task ◽  
Short Term ◽  
Support Tool ◽  
Market Participants

The main task of this paper is to examine a short term trend trading strategy in futures market based on chart pattern recognition, time series and computational analysis. Specifications of historical data for technical analysis and equations for futures profitability calculations together with position size measurement are also discussed in the paper. A contribution of this paper lies in a novel chart pattern related to fractal formation and chaos theory and its application to short term up-trend trading. Trading strategy was tested with historical data of the most active futures contracts. The results have given significantly better and stable returns compared to the change of market benchmark (CRB index). The results of experimental research related to the size of trading portfolio and trade execution slippage are also discussed in the paper. The proposed strategy can be attractive for futures market participants and be applied as a decision support tool in technical analysis.

scholarly journals Role of the Futures Market on Volatility and Price Discovery of the Spot Market: Evidence from Pakistan’s Stock Market

2006 ◽  
Vol 11 (2) ◽  
pp. 107-121 ◽  
Author(s):  
Safi Ullah Khan
Keyword(s):  
Stock Market ◽  
Alternative Hypothesis ◽  
Relevant Information ◽  
Spot Market ◽  
Futures Market ◽  
Spot Price ◽  
Vector Error Correction ◽  
Spot Prices ◽  
New Information

This paper focuses on the role of the financial futures market in the volatility of Pakistan’s stock market and determines whether the stock futures price is capable of providing some relevant information for predicting the spot price. The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) approach is used to measure volatility in the spot and the futures market and to analyze the relationships between spot and futures market volatility. Causality and feedback relationships between the two markets are analyzed and determined through the Vector Error Correction Model (VECM). Empirical results support the evidence that spot prices generally lead the futures prices in incorporating new information, and that volatility in the futures market does not increase volatility in the spot market. Rather the study finds more consistent support for the alternative hypothesis that volatility in the futures market may be an outgrowth of the volatile spot market.

scholarly journals Single Stock Futures Trading and Stock Price Volatility: Empirical Analysis

2009 ◽  
Vol 48 (4II) ◽  
pp. 553-563 ◽  
Author(s):  
Safi Ullah Khan ◽  
Syed Tahir Hijzi
Keyword(s):  
Stock Market ◽  
Trading Volume ◽  
Price Volatility ◽  
Futures Contracts ◽  
Sufficient Evidence ◽  
Spot Price ◽  
Return Volatility ◽  
Futures Trading ◽  
Underlying Stocks ◽  
Single Stock Futures

This study examines impact of the introduction of single stock futures contracts on the return volatility of the SSFs-listed underlying stocks. The study documents a significant decrease in return volatility for the SSFs-underlying stocks following the introduction of single stock futures contracts on the Karachi Stock Exchange. The multivariate analysis in which the spot trading volume, the futures trading volume and open interest were partitioned into news and informationless components, the estimated coefficient of expected futures volume component is statistically significant and negatively related to volatility, suggesting that equity volatility is mitigated when the expected level of futures activity is high. The findings of the decreased spot price volatility of the SSFs-underlying stocks associated with large expected futures activity is important to the debate of regarding the role of equity derivatives trading in stock market volatility. These empirical results for the Pakistan’s equity market support theories implying that equity derivates trading improves liquidity provision and depth in the equity markets, and appear to be in contrast to the theories implying that equity derivates markets provide a medium for destabilising speculation. Finally, the SSFs-listed stocks were grouped with a sample of non-SSFs stocks to examine cross-sectional data for comparing changes in return volatility. After controlling for the effects of a number of determinants of volatility, sufficient evidence is found to support that, this multivariate test, like the previous analysis, provides no evidence that the volatility of the SSFsunderlying stocks is positively related to the introduction of the single stock futures trading in the Pakistan’s stock market.

scholarly journals Are bitcoin futures contracts for hedging or speculation?

2020 ◽  
Vol 17 (3) ◽  
pp. 1-9
Author(s):  
Ramzi Nekhili
Keyword(s):  
Trading Volume ◽  
Futures Market ◽  
Futures Contracts ◽  
Risk Minimization ◽  
Full Sample ◽  
Market Participants ◽  
Hedging Effectiveness ◽  
Informed Traders ◽  
Increasing Demand ◽  
Robustness Check

The emerging interest in Bitcoin futures market has led to questions on its trading form and contribution to risk minimization. These questions are important for market participants, including hedgers and speculators. This paper addresses the possible trading motive in Bitcoin futures market in being speculation or hedging. The author first tests a model relating Bitcoin futures returns with trading volume and conditional volatility, estimated with a GJR-GARCH specification, on a full sample of daily futures prices. A robustness check is then conducted by investigating the hedging effectiveness of Bitcoin futures and the speculation-hedging ratios on individual Bitcoin futures contracts. The estimation results on Bitcoin futures contracts, spanning from December 2017 to February 2020, show a significant positive relationship between futures returns and lagged volume. The speculation-hedging measures used for Bitcoin futures contracts maturing in March, June, September, and December reveal an increasing demand for speculation. Also, the Bitcoin spot’s full-hedge and OLS-hedge strategies with Bitcoin futures provide no gain over a no-hedge strategy. The results reveal strong evidence that traders in the Bitcoin futures market are motivated by speculation rather than hedging. This further puts in evidence the existence of asymmetric information within informed traders in Bitcoin futures market, and therefore market participants would not insure their positions against Bitcoin price movements.

Cointegration, linear and nonlinear causality

2014 ◽  
Vol 4 (2) ◽  
pp. 157-171 ◽  
Author(s):  
Tarun Kumar Soni
Keyword(s):  
Futures Market ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Spot Price ◽  
Agricultural Commodities ◽  
Agricultural Commodity ◽  
Content Type ◽  
Price Series ◽  
Cointegration Tests ◽  
Linear And Nonlinear

Purpose – The purpose of this paper is to study the market efficiency, unbiasedness and the direction of causality among four agricultural commodity futures contracts for a forecasting horizon of 28 days, 56 days and 84 days which are traded at National Commodity and Derivatives Exchange Ltd. Design/methodology/approach – To analyse the efficiency of futures market in Indian scenario, we focus on maize, chickpea, soybean and wheat which are among the most important agricultural commodities traded in India. In the first step, Augmented Dickey-Fuller test and nonparametric Phillips-Perron approaches have been used to examine the stationarity of all futures and spot price series. After testing the presence of cointegration in futures and spot series using Johansen’s Cointegration approach, the joint restrictions of β 0=0, β 1=1 and β 1=1 on the cointegrating vectors were imposed to test whether the futures price is an unbiased predictor of spot at contract maturity. In the next step, linear Toda and Yamamoto (1995) and the nonparametric Diks and Panchenko (2006) causality tests were applied to examine the direction of causality. Finally, nonlinear test were applied on the vector error correction model (VECM) residuals to investigate whether any remaining causality is strictly nonlinear in nature. Findings – The results of cointegration tests between futures and spot prices of the selected agricultural commodities indicated a long term relationship do exist in three out of four futures contracts. However, the Wald tests results on the cointegrating vectors indicate markets as inefficient and biased. Further, analysis of short-term relationship using alternate tests of causality do not give consistent results for same commodity series indicating that results may vary due to alternate measures and specifications. Finally, if we consider the results of Diks-Panchenko test on the filtered VECM-residuals, results provide evidence that if cointegration is taken into account; neither spot nor future leads or lags the other consistently. Research limitations/implications – The results are based on the sample of four agricultural futures commodity contracts. The study can be extended to a larger sample of contracts and relative efficiency of each contract can be explored. Originality/value – There are very few studies that have explored the efficiency, unbiasedness and direction of causality using both linear and nonlinear techniques for Indian agriculture commodity futures market for different forecasting horizons.

scholarly journals Bubbles During Covid-19 Period: Evidence from the United States Using the Generalized Sub ADF Test

2021 ◽  
Vol 12 (1) ◽  
pp. 49-56
Author(s):  
Tsangyao Chang ◽  
Chen-Min Hsu ◽  
Mei-Chih Wang
Keyword(s):  
United States ◽  
Stock Market ◽  
Stock Price ◽  
The United States ◽  
Policy Implications ◽  
Time Period ◽  
The Us ◽  
Price Indexes ◽  
Adf Test ◽  
First Time

Abstract This study applies the generalized sub ADF (GSADF) tests to investigate whether bubbles exist in the United States markets over the period of 2015-2019, focusing on the COVID-19 period. We use daily Dow-Jones stock price indexes for the first time during the time period of 2015/1/7-2020/3/17. Empirical results demonstrate the existence of bubbles in the US stock market during some sub-sample time periods. Especially important, we find the third bubble begins from 2020/2/26 and grows gradually, not bursting until recently, a situation that is ongoing in the US market. Our results have important policy implications for investors who attempt to invest in the US stock market

Pricing of Futures Contracts

2018 ◽  
Author(s):  
Timothy A. Krause
Keyword(s):  
Fair Value ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Spot Price ◽  
Futures Prices ◽  
No Arbitrage ◽  
Spot Prices ◽  
Cost Of Carry ◽  
Contract Expiration ◽  
The Cost

This chapter examines the relation between futures prices relative to the spot price of the underlying asset. Basic futures pricing is characterized by the convergence of futures and spot prices during the delivery period just before contract expiration. However, “no arbitrage” arguments that dictate the fair value of futures contracts largely determine pricing relations before expiration. Although the cost of carry model in its various forms largely determines futures prices before expiration, the chapter presents alternative explanations. Related commodity futures complexes exhibit mean-reverting behavior, as seen in commodity spread markets and other interrelated commodities. Energy commodity futures prices can be somewhat accurately modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process, although whether these models provide economically significant excess returns is uncertain.

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