Bond Futures Research Articles

Which News Moves the Euro Area Bond Market?

Abstract This paper explores a long dataset (1999-2005) of intraday prices on German long-term bond futures and examines market responses to major macroeconomic announcements and ECB monetary policy releases. German bond markets tend to react more strongly to the surprise component in US macro releases compared with aggregated and national euro area and UK releases, and the strength of those reactions to US releases has increased over the period considered. We also document that the numbers of German unemployed workers consistently have been known to investors before official releases.

Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange

AbstractThis paper examines the impact of a reduction in the minimum price increment on liquidity and execution costs in a futures market setting. In 2006, the Sydney Futures Exchange halved the minimum tick in the 3 Year Commonwealth Treasury Bond Futures. Results indicate that bid‐ask spreads are significantly reduced after the change. Quoted depth, both at the best quotes and visible in the limit order book, is significantly lower after the tick reduction. Further analysis reveals that execution costs are significantly reduced after the change. We conclude that a tick size reduction improves liquidity and reduces execution costs in a futures market setting.

Volatility linkages of the equity, bond and money markets: an implied volatility approach

AbstractThis study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets.

Liquidity Premia in German Government Bonds

There is strong evidence that on-the-run U.S. Treasury securities trade much more liquidly and at significantly higher prices than their off-the-run counterparts. We examine if the same phenomenon is present in the German government bond market whose market structure differ markedly from that of the U.S. Treasury market. In sharp contrast to the U.S. evidence, we find that on-the-run status has only a negligible effect on the liquidity and pricing once other factors have been controlled for. Instead, the highly liquid German bond futures market, whose turnover is many times larger than in the cash market, leads to significant liquidity spillovers. Specifically, we find that bonds which are deliverable into futures contracts are both trading more liquidly and commanding a significant price premium, and that this effect became more pronounced during the recent financial crisis.

Volatility Persistence of High-Frequency Returns in the Japanese Government Bond Futures Market

The availability of a two-year high-frequency transaction data of the Japanese Government Bond (JGB) futures provides us with an opportunity to uncovering volatility persistence in high-frequency returns and testing the mixed-distribution-hypothesis (MDH) in this market. Both time-domain and frequency domain methods show that the degrees of volatility persistence are very similar across various frequencies, which supports the MDH. The result also shows that the method of filtering out the intraday pattern annihilates the complex interaction of the intraday periodicity and the volatility persistent process, and effectively uncovers volatility persistence phenomenon in the high-frequency data.

How potent are news reversals?: Evidence from the futures markets

AbstractA theoretical model is presented, which predicts a heightening in return volatility following a news reversal. A reversal occurs when a value of an economic indicator that is larger than the forecasted value is followed in the following month by a value smaller than the forecasted value, or vice versa. The model also suggests that the effects of a news reversal will be more pronounced early in the monthly macroeconomic news cycle. The predictions of the model for trading activity are less clear. The main predictions of the model were tested employing intraday data for the nearby Treasury bond futures contract. Consistent with the model, the data show significantly greater responses in volatility per standard‐deviation surprise when there is a news reversal, than otherwise. Further, the increased sensitivity in volatility is especially perceptible early in the announcement cycle. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:42–73, 2009

Limit order book, anonymity and market liquidity: evidence from the Sydney Futures Exchange

AbstractThis study examines the impact of the removal of broker mnemonics on the Sydney Futures Exchange. Early research finds that a decrease in transparency reduces liquidity in the market, whereas more recent research finds that reduced transparency improves market quality. Results of the present study indicate an improvement in liquidity after the removal of broker mnemonics. There is a significant increase in quoted depth and trading volume, and a significant decrease in quoted spreads in the 90 day Bank Accepted Bill, 3 year Treasury Bond and 10 year Treasury Bond Futures. This improvement in liquidity is robust to the length of the event window around the structural change and trading in a control market.

Jumps, Cojumps and Macro Announcements

We use recently proposed tests to extract jumps and cojumps from three types of assets: stock index futures, bond futures, and exchange rates. We then characterize the dynamics of these discontinuities and informally relate them to U.S. macroeconomic releases before using limited dependent variable models to formally model how news surprises explain (co)jumps. Nonfarm payroll and federal funds target announcements are the most important news across asset classes. Trade balance shocks are important for foreign exchange jumps. We relate the size, frequency and timing of jumps across asset classes to the likely sources of shocks and the relation of asset prices to fundamentals in the respective classes.

An analysis of the true notional bond system applied to the CBOT T-bond futures

The conversion factor system (CFS) is used in the determination of the invoice price of the Chicago Board of Trade Treasury-bond futures. As an alternative to the CFS, Oviedo [Oviedo, R.A., 2006. Improving the design of Treasury-Bond futures contracts. The Journal of Business 79, 1293–1315] proposed the True Notional Bond System (TNBS), and showed that it outperforms the CFS when interest rates are deterministic. The main purpose of this paper is to compare the effectiveness of the two systems in a stochastic environment. In order to do so, we price the CBOT T-bond futures as well as all its embedded delivery options under both the CFS and the TNBS. Our pricing procedure is an adaptation of the Dynamic Programming algorithm described in Ben-Abdallah et al. [Ben-Abdallah, R., Ben-Ameur, H., Breton, M., 2007. Pricing CBOT Treasury Bond futures. Les Cahiers du GERAD G-2006-77]. Numerical illustrations show that, in a stochastic framework, TNBS does not always outperform the CFS. However, as the long-term mean moves away from the level of the notional rate, the TNBS performs increasingly better than the CFS.

Macroeconomic announcements, intraday covariance structure and asymmetry in the interest rate futures returns

AbstractThe effects of scheduled macroeconomic announcements on the real‐time intraday return volatilities, covariances, and correlations between the Eurodollar futures and the U.S. Treasury bond futures markets are studied. These announcements are responsible for most of the observed intraday jumps in volatilities, covariances, and correlations. The details of the linkage are intriguing and include announcements timing effect. Further study on intraday asymmetric volatility and correlation‐in‐volatility indicates that news announcements magnify asymmetric volatility and shed light on why correlations tend to be high when volatilities are high. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:815–844, 2008

Delivery Options and Convexity in Treasury Bond and Note Futures

Using Treasury bond and note futures to hedge fixed income portfolios is complicated by the large number of bonds that are eligible to deliver against the contract. Grieves and Marcus (2005) show that in some circumstances, only two bonds - those with the highest and the lowest durations - are relevant for the hedging problem, which makes computation of analytic hedge ratios tractable. We evaluate the empirical efficacy of their two-relevant-bond model. We compare the maturities of actual cheapest-to-deliver bonds to the prediction of the two-deliverable model, and calculate empirical price-values-of-a-basis-point for Treasury futures contracts to determine whether contract prices display the negative convexity predicted by the model. The model worked very well for the note contract and very poorly for the bond contract. We show that the difference in model performance is related to the shape of the yield curve.

Do tax‐exempt yields adjust slowly to substantial changes in taxable yields?

AbstractThis paper examines the profitability of two futures trading strategies: a municipal bond futures contract strategy and a spread strategy consisting of a municipal bond futures contract and a Treasury bond futures contract. Both strategies are designed to exploit a slow municipal yield adjustment following changes in Treasury yields. We find economically significant profits to both strategies. Average holding period returns per trade for both strategies tend to increase with the magnitude of the Treasury yield change. Profit distributions associated with various Treasury yield change thresholds tend to be positively skewed, and median profits are significantly lower than average profits. The profitability results are consistent with slow municipal yield adjustments. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:763–789, 2008

Volatility Linkages of the Equity, Bond and Money Markets: An Implied Volatility Approach

This study proposes an alternative approach for examining volatility linkages between Standard & Poor's 500, Eurodollar futures and 30 year Treasury Bond futures markets using implied volatility from the three markets. Simple correlation analysis between implied volatilities in the three markets is used to assess market correlations. Spurious correlation effects are considered and controlled for. I find that correlations between implied volatilities in the equity, money and bond markets are positive, strong and robust. Furthermore, I replicate the approach of Fleming, Kirby and Ostdiek (1998) to check the substitutability of the implied volatility approach and find that the results are nearly identical; I conclude that my approach is simple, robust and preferable in practice. I also argue that the results from this paper provide supportive evidence on the information content of implied volatilities in the equity, bond and money markets.

A Reduced Form Framework for Modeling Volatility of Speculative Prices Based on Realized Variation Measures

Building on realized variance and bi-power variation measures constructed from high-frequency financial prices, we propose a simple reduced form framework for effectively incorporating intraday data into the modeling of daily return volatility. We decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance. Our empirical results, based on long samples of high-frequency equity and bond futures returns, suggest that the dynamic dependencies in the daily continuous sample path variability is well described by an approximate long-memory HAR-GARCH model, while the overnight returns may be modelled by an augmented GARCH type structure. The dynamic dependencies in the non-parametrically identified significant jumps appear to be well described by the combination of an ACH model for the time-varying jump intensities coupled with a relatively simple log-linear structure for the jump sizes. Lastly, we discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.

An analysis of the failed municipal bond and note futures contracts

AbstractThis study analyzes the failure of the municipal bond and municipal note futures contracts. The municipal bond contract is shown to have been the most effective hedge in the municipal market over its tenure. Changes in volume in the municipal bond contract were closely related to changes in the volume in the U.S. Treasury bond futures contract, the spot–municipal‐over‐bonds (MOB) ratio, and visible supply. The failure of the municipal bond contract is mainly attributed to a decrease in trading volume in the U.S. Treasury futures market. This was impacted by the onset of electronic trading, which the municipal futures market was reluctant to embrace. The municipal note contract was a less effective hedge than U.S. Treasury note futures and ten‐year London Interbank Offered Rate swaps. The failure of the municipal note futures contract is attributed to the existence of well‐established alternative hedges, and segmentation in the municipal market. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:656–679, 2008

Monetary Policy Effects on Long-Term Rates and Stock Prices

This paper explains the effects of monetary policy surprises on long-term interest rates and stock prices in terms of changes in expected inflation, real interest rate and dividend growth, and relates these effects to markets' perceptions of economic shocks and Fed's information set. We analyze stock and bond futures price co-movements and relate them to Treasury Inflation-Protected Securities (TIPS) data. The sign of long-term interest rate reactions is mostly driven by changes in expected inflation. The sign of stock price reactions is mostly driven by changes in expected dividend growth, but it is also sometimes determined by changes in expected real rates. The co-movements of long-term interest rates and stock prices are determined by the co-movements of expected inflation and dividend growth. The majority of Fed's interest rate surprises are expected to be followed by negative co-movements between and output. This can be due to relatively more frequent inflation or supply shocks together with Fed's private information. Most Fed's actions are perceived as reactions to economic shocks rather than true policy shocks.

Does deliverability enhance the value of U.S. Treasury bonds?

AbstractThis study presents the first examination of the value associated with long‐term U.S. Treasury bonds related to their delivery eligibility in the Treasury bond futures market. The opportunity for study has recently become possible given the reduced maturity of Treasury's noncallable bonds in the market. Consistent with rational behavior, deliverable bonds are found to be more valuable than otherwise comparable, ineligible bonds, and the estimated premia are larger than those previously documented for deliverable bills. However, although detectable and statistically significant, the deliverability component of a cash bond's value is somewhat modest in economic terms; some policy implications of this result are discussed. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:264–274, 2008

Explicit European Swaption Formula in a Separable One-Factor Libor Market Model; Extension to Bond Futures and 2-Bermudan Swaptions

In the framework of the Libor Market Model (LMM) an explicit pricing formula is obtained for European swaptions. The LLM used is a displaced diffusion also called Bond Market Model (BMM). The results are similar to the one obtained for the Gaussian HJM. The extension to bond futures and 2-Bermuda swaptions is also provided.

Analysis of price fluctuations in futures exchange markets

We show that the fluctuations of the tick-by-tick logarithmic price in a futures market can be described in terms of the Fokker–Planck equation (FPE). We calculate the corresponding drift and diffusion coefficients and argue that these values can contain some information pertaining to the market state. It is particularly showed that the Korean treasury bond (KTB) futures is well described by a FPE and has a similar structure to turbulence.

Price and Volume Response to Public Information

It is well known that public information affects prices before anyone can trade on it (French and Roll (1986)). In contrast, several models assuming heterogeneous investors show that a public news release is directly followed by a high trading volume. This paper examines the process of price adjustment to public news in an electronic limit order market. The problem is analysed based on a very precise data set from the largest European bond futures market and a higher frequency than in all previous empirical studies on this issue. I find that the price response to public news occurs through trading. Good news releases are initially followed by a large buying and bad news releases by a large selling activity observed already in the first ten seconds after an event.