The Role of CDS Market in the Price Discovery Process of the “PIIGS” Countries Sovereign Credit Risk During the Recent Decade of Monetary Easing

The aim of this paper is to analyze the long-lasting dynamic relationship between the credit default swap (CDS) premia and the government bond spreads (GBS), with regard to the sovereign credit risk. The practical focus is to evaluate whether the CDS market effectively is the leading or the lagging market in the credit risk price discovery process during the last decade of monetary easing. The analysis extends to all “sensitive” countries in the Eurozone, the so-called “PIIGS” countries (excluded Greece) for the interval 2007-2017. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spread, Government bond spread, Sovereign credit risk, Cointegration, Vector error correction model, Granger-causality.

Price Transmission in Cotton Futures Market: Evidence from Three Countries

This study examines the price transmission between cotton prices in U.S., Indian, and Chinese futures markets. We focus on studying the long-run price movements using cointegration and alternate causality tests. The empirical results indicate the following: (a) the U.S. cotton futures market continues to be the most dominant market, and it leads price changes in India and China; (b) the cotton prices in India also impacts the cotton prices in China as we report a unidirectional relationship flowing from India to China; (c) there is duality of direction of price transmission for U.S. and Chinese commodity markets as we document bi-directional causality between U.S. to Chinese cotton futures for the entire period and uni-directional causality from U.S. to Chinese markets for the two sub-periods; (d) the long-term relationship between the three markets has seen a significant shift as documented by the absence of cointegration which may be due to changes in government policy, especially in India and China specifically after 2014. Overall, results provide support for further reforms especially for Indian and Chinese commodity exchanges so that they can play a vital role in the price discovery process especially for commodities that are largely produced or consumed in these economies.

The Price Discovery Processes in China, India, and Russia’s Stock Index Futures Markets

In this paper, we examine the price discovery patterns in the three BRICS countries’ stock index futures markets which were launched after 2000 – China, India, and Russia. We find the futures market dominates the price discovery process in China and India, but less so in Russia. A closer examination reveals the dynamic nature of the price discovery process, and the significant impacts on futures’ price discovery functions from China’s regulatory changes in September 2015 and Russia’s economic sanctions in March 2014. The results also show a more balanced and bidirectional volatility spillover between futures and spots in China and India than in Russia.

Functional Effectiveness of Commodity Futures Market: A Comparative Assessment of Agricultural and Metal Commodities

The study focuses on examining the price discovery process, short run disturbances and hedging mechanism of agricultural and metal commodities futures market for the period January 2010 to December 2018. Contango and normal backwardation have also been taken into deliberation for select commodities which are traded in MCX and NCDEX, India which is a valuable addition to the existing body of literature in derivatives market. Johansen’s co-integration, VECM, Granger causality test and OLS are employed for understanding the price discovery and constant hedging for select commodities. Further, existence contango and normal backwardation have been observed by comparing the spot and futures prices. It has been found that spot market is acting as a leader in the longer period and laggard in short run investors can be benefitted to take short run or long run investment decision.

The Incremental Value Relevance of Media Coverage of Earnings Announcements: Evidence from the Trading of Short Sellers

We investigate the relation between media coverage and the trading behavior of short sellers around earnings announcements. Prior research provides conflicting evidence on the role of the media, with some studies finding that the media can impede the price discovery process. Our evidence indicates that short sellers increase their activity in line with the tone of media coverage around earnings announcements, after controlling for earnings news and other factors that affect relative levels of short selling. Furthermore, we show that information in the media successfully forecasts earnings information in the days leading up to the earnings announcement, and that short sellers trade in a manner consistent with information reflected in media coverage preceding the earnings announcement. Our findings are consistent with information contained in the media having value relevance, and suggest that the media may help to facilitate the price discovery process around the release of earnings.

The Cross-Border Price Discovery and the Shanghai-Hong Kong Stock Connect

This study mainly investigates the price discovery relationship between stock and futures markets and the cross-border price discovery relationship between Chinese and Hong Kong markets after the launch Shanghai-Hong Kong Stock Connect Progress. We find that this progress increases the speed of adjustment from the long-term equilibrium in the Chinese spot and futures markets. Moreover, the price discovery process mainly happens in Hong Kong’s spot and futures markets. Final, cross-border price discovery is from Hong Kong to China after this progress. JEL classification numbers: G15, G18 Keywords: Price Discovery, Shanghai-Hong Kong Stock Connect

Information Spillover in Indian Agricultural Commodities Market

Role of agricultural sector in Indian economy is prominent, as being an agrarian economy and having the second highest population in the world. Thus, the efficiency of this sector is the foremost factor for development and growth of the economy. This article attempts to examine the price discovery relationship of future and spot prices of five agricultural commodities, namely cardamom, crude palm oil, cotton, mentha oil and kapas, during the period 2011–2019. Johansen’s co-integration test, vector error correction model (VECM) and Granger causality block exogeneity test were employed for the study. We found that price discovery process is established for agricultural commodities under consideration. Future prices act as a leader in achieving long-run equilibrium for all commodities except cardamom. Causality was significantly reported for all commodities, as bidirectional causality runs between the prices. The study suggests that Forward Market Commission should be empowered more to control and regulate the market, which will ensure the efficient market situations in these commodities’ market. Attempt was made to evaluate price discovery process in agricultural commodities market during post sub-prime crisis period, which was ignored by majority of researchers.

Price discovery and pairs trading potentials: the case of metals markets

Purpose This study aims to validate the “expectancy theory” of asset pricing and explores the price discovery process in metals futures markets. Design/methodology/approach This paper adopts the Johansen cointegration and vector error correction model approach to investigate the potentials of Pairs trading in the metals market during the period 2008–2019. Findings The results find the price movements in metal markets are not random walk and the current “futures” prices are the reasonable estimate of the “spot” metal prices in future. This study does not notice any significant differences in the price efficiency across metals markets, which signal the effects of limited idiosyncratic forces in price transmission. Practical implications The research suggests the covert use of metal futures to make gains from arbitrage trading. Originality/value The study emphasizes the potential of “pair trading” in commodity market context that is seldom discussed in academic papers.

The Dynamic Progression of the Redenomination and Sovereign Risk in the Price Discovery Process of Italian Banks’ CDSs

The recent global financial crisis and the subsequent sovereign debt crisis of the Eurozone peripheral countries have generated historic levels of volatility and instability in the financial markets. In particular, during the sovereign debt crisis market operators have begun to focus on the so-called “redenomination risk”, that is the hypothesis of exit from the EMU (Euro Monetary Union) by one or more countries and the consequent redenomination of their debt in the past national currency. This type of risk constitutes a form of additional credit risk premium due to expected systemic failure of the Eurozone. The effects of the economic-financial crisis, the weak economic growth and the political instability that have characterized especially the Italian system in recent years provide the ideal starting point to analyze the evolution of the redenomination risk in the pricing process of the Italian banks’ CDSs (Credit Default Swaps). The contribution of this work is to evaluate the dynamic evolution of sovereign and redenomination risk in the price discovery process of the Italian banks’ CDS spreads (or premia) by using rolling window regressions. Results show that redenomination risk explains a great part of the variance in the CDS spreads during periods of financial distress. The sovereign risk component explains a large part of the variance for almost the entire considered period. JEL Classification: G01, G12, G14, G20. Keywords: CDS spreads, Sovereign risk, Redenomination risk, Rolling window regressions, ISDA basis.

The Evolution of the Lead-lag Markets in the Price Discovery Process of the Sovereign Credit Risk: the Case of Italy

Hedging and speculative strategies play a key role in periods of financial market volatility particularly during economic crises. In such contexts, liquidity problems tend to evolve into potential credit risk events that amplifies the volatility of several markets such as the CDS and the government bond markets. The former, however, generally embodies a higher sensitivity to volatility due to the operators’ uncertainty about unstable and countercyclical counterparty risk. The aim of this paper is to analyze the long-lasting dynamic relationship between credit default swap (CDS) premia and government bond yield spreads (GBS), by focusing particularly on sovereign credit risk, in order to evaluate the lead-lag markets in the price discovery process against the backdrop of a deep financial crisis. The focus of this study concerns the country of Italy, one of the major European countries that suffers from both weak GDP growth and high public debt, which subjects it to volatility and speculation during periods of financial stress. JEL classification numbers: G01, G12, G14, G20. Keywords: CDS spreads, Government bond spreads, Credit risk, Cointegration, Vector error correction model, Granger-causality.