The impact of embedded location options on price discovery of agricultural futures contracts – the evidence from the Chana contract

Purpose Embedded options can create asymmetries in information impounded by cash and futures markets, causing errors in price discovery estimation. This paper aims to investigate the impact of embedded location options on measures of price discovery. Design/methodology/approach Various price discovery metrics are computed using observed futures prices that contain embedded location options and cash prices for Chana. Prices of a futures contract that contains no options using observed futures prices and estimates of location option value are synthesized. The price discovery measures are recomputed using synthetic option-adjusted futures contract prices and cash prices, and changes in these measures are attributed to the impact of the embedded location option. Findings If the presence of the location option is ignored, futures appear to dominate price discovery. Once the location option is adjusted for, cash markets are found to dominate price discovery. Research limitations/implications The lack of complete time-series data from the exchange for multiple commodities allows only limited empirical evidence for generalizing conclusions. Practical implications This paper highlights that regulators, exchanges and policymakers in India need to revisit delivery specifications of agricultural commodity futures contracts to enhance their utility from a price discovery perspective. Originality/value This work shows that ignoring the presence of embedded options can cause significant errors in price discovery assessment of agricultural futures contracts, particularly in heterogenous cash markets.

STRATEGIC INTERACTIONS AND NEGATIVE OIL PRICES

This paper argues on theoretical grounds that the negative oil prices event on April 20, 2020, was mainly due to the strategic interactions among some active traders on both sides of the futures contract. We present a three-player game of futures trading in which a continuum range of negative price can be supported as (strong) Nash equilibrium, yet none of those constitutes an [Formula: see text]-equilibrium originally developed by Ma (2009). We further propose the notion of coalition-with-side-payment as a solution concept for the environment where strategic interactions and transfer payments among players are allowed. Our model captures the mechanism underlying futures price manipulation, and its predictions largely agree with the observations on that day, which are beyond the scope of demand–supply and physical delivery narratives.

The Liquidity Spillover Effects Between the Stock Index Futures and Spot Under the Fractal Market Hypothesis

In recent years, the extreme risk events occurred frequently in the financial market have not only brought huge losses to investors and inflicted heavy losses on the market, but also posed a severe challenge for the traditional effective market hypothesis. These extreme risk events are often accompanied by sudden plummeting of liquidity. Different from the efficient market hypothesis(EMT), firstly, this paper studies the nonlinear fluctuation characteristics and causes of contracts with different maturity periods in China stock index futures market under the framework of fractal market theory and using the multifractal detrended fluctuation model Secondly, under the framework of the fractal market theory, the existence of the liquidity spillover effect between the stock index futures and spot is tested, the direction, intensity, and contribution of spillover between stock index futures and spot are analyzed. Finally, there is a robustness test. The study finds that both stock index futures and stock index spot in China have obvious nonlinear fractal fluctuation characteristics, and stock index futures have higher degree of multifractal, the characteristics are related to correlated multifractal and distributed multifractal; the longer the maturity period of the stock index futures contract, the lower the multifractal degree; there are significant asymmetric liquidity spillover effects between the stock index futures and spot; the multifractal degree has an important influence on the intensity and contribution of the liquidity spillover effect, and the multifractal degree is inversely proportional to the intensity of liquidity spillover and the contribution of spot to futures fluctuations.

INDEX FUTURES INTRODUCTION AND STOCK MARKET VOLATILITY: EMPIRICAL STUDY IN VIETNAM

This paper aims at answering the question whether the VN30 index futures introduction has an impact on stock market volatility in Vietnam. Apply GARCH model of volatility with additive dummy variable from 28/7/2000 to 10/9/2020, the result shows that when the first listed index futures contract appears, it makes the volatility of VNIndex increases. The result is still robust after excluding the turmoil period of Vietnam stock market. This paper implies that policy maker should be more careful in promoting derivatives market in Vietnam.

Shock Transfer in Futures and Spot Markets: An Agent-Based Simulation Modelling Method

There have been heated debates about the role of stock index futures in the financial market, especially during the crash periods. In this paper, a multiagent spot-futures market model is developed to analyze the micromechanism of shock transfer across spot and futures markets. We assume that there are two stocks and one stock index futures contract in the spot-futures market. Agents are heterogeneous, including fundamentalists, chartists, noise traders, and arbitragers. The spot market and the futures market are linked by arbitragers. The simulation results show that our spot-futures market model can reproduce various important stylized facts, including the price co-movement between stock index prices and index futures prices and the fat-tailed distribution of the returns of risky assets and the basis. Further analysis shows that when we introduce an exogenous fundamental shock to one of the stocks, the backwardation phenomenon appears in the futures market and the shock is widespread across the whole market by means of index futures. Moreover, the backwardation gradually disappears when the number of arbitragers increases. Besides, when there are few arbitragers or when there are sufficient arbitragers, shocks cannot be transferred to other stocks via the futures market, while an intermediate level of arbitrage will amplify the shock transfer and hurt market stability. These findings underscore that arbitragers play an important role in spot-futures market interaction and shock transfer, and adequate arbitrage trading during crises may help eliminate the positive basis and halt the further spread of the crises.

The Impact of the Introduction of Index Futures on the Daily Returns Anomaly in the Ho Chi Minh Stock Exchange

This study investigated the impact of the introduction of the VN30-Index futures contract on the daily returns anomaly for the Ho Chi Minh Stock Exchange (HOSE). Daily returns of the VN30-Index for the period 6 February 2012 through 31 December 2019 are used in this study to ascertain the new VN30-Index futures contract influence on the day-of-the-week anomaly observed in the HOSE. To test this effect, ordinary least square (OLS), generalized autoregressive conditional heteroskedasticity [GARCH (1,1)] and exponential generalized autoregressive conditional heteroskedasticity [EGARCH (1,1)] regression models were employed. The empirical results obtained from the models support the presence of the day-of-the-week effect for the HOSE during the study period. Specifically, a negative effect was observed for Monday. However, the analysis revealed that the day-of-the-week effect was only present in stock returns for the pre-index futures period, not for the post-index futures period. These findings suggest that the introduction of the VN30-Index futures contract had a significant impact on the daily returns anomaly in Vietnam’s HOSE, providing evidence that the introduction of the index futures contract facilitated market efficiency.

Price discovery and market efficiency of cardamom in India

Purpose Transparent and fair price discovery is essential to commodity market participants in the trade value chain for competitive benefit. The purpose of this paper is to investigate the price discovery of Indian cardamom at e-auction, spot and futures markets in addition to the existence of the day of the week effect at e-auction apart from exploring a novel price risk management framework. Design/methodology/approach This study used Johansen co-integration, vector error correction model, Granger causality and regression with dummy variables to understand a day of the week effect in high-value agri-commodity of cardamom e-auction prices. These price data were based on authenticated sources of Spices Board India and Multi Commodity Exchange of India Ltd. Findings The statistical results indicate price discovery exists in the e-auction market and it leads to spot and futures prices. cardamom e-auction prices are negatively related to cardamom futures and positively related to spot prices. It also finds the non-existence of the day of the week effect in the high-value cardamom e-auction system in India. The study revealed that a cardamom e-auction is more active in price discovery than a cardamom futures contract. Research limitations/implications These results shall facilitate policymakers to explore intervention of online forward market mechanism at the national level to ensure price discovery and market efficiency. However, the study did not explore reasons for the non-equilibrium of a cardamom futures contract with spot and e-auction market. Practical implications The results of this study are useful in understanding the price discovery of cardamom e-auction and its role in the spot and futures market. Cardamom price discovery depends upon the e-auction system; any change of auction policy shall be binding on Indian cardamom prices. The introduction of an online forward market mechanism as described in the paper shall facilitate price risk management apart from improving the efficiency of price discovery. Originality/value This is the first study considering cardamom e-auction, spot and futures prices in the price discovery process in India. Statistical results of a day of the week effect clearly show no significant volatility of cardamom prices during the week. Besides, this study did not find the role of cardamom futures contracts intended to serve the economic function of price discovery and price risk management. Hence, suggests policy intervention for implementing an online Forward Market mechanism for Indian cardamom to ensure market efficiency and manage price risk.

Price Leadership and Volatility Linkages between Oil and Renewable Energy Firms during the COVID-19 Pandemic

The COVID-19 pandemic is having a strong influence in all areas of society, like wealth, economy, travel, lifestyle habits, and, amongst many others, financial and energy markets. The influence in standard energies, like crude oil, and renewable energies markets has been twofold: from one side, the predictability of volatility has strongly decreased; secondly, the linkages of the price time series have been modified. In this paper, by using DCC-GARCH and Price Leadership Share methodology, we can investigate the changes in the influences between standard energies and renewable energies markets by analyzing one-minute time series of West Texas Intermediate crude oil futures contract (WTI), the Brent crude oil futures contract (BRENT), the STOXX Europe 600 oil & gas index (SXEV), and the European renewable energy index (ERIX). Our results confirm volatility spillover between the time series. However, when assessing the accuracy of the predictability of the DCC-GARCH model, the results show that the model fails its prediction in the period of higher instability. Besides, we found that price leadership has been strongly influenced by the virus spreading stages. These results have been obtained by dividing the period between September 2019 and January 2021 into 6 subperiods according to the pandemic stages.