Cash Market Research Articles

Ensuring Market Integrity and Stability: Circuit Breakers on International Trading Venues

Circuit breakers are important mechanisms used to prevent excess short-term volatility and to ensure price continuity. This article presents the results of an international survey on the design and application of circuit breakers on trading venues worldwide. The majority (86%) of the responding trading venues apply circuit breakers and thereby aim to ensure investor protection and increase market integrity and stability. On cash markets, market-wide trading halts and volatility interruptions are the most prevalent types of circuit breakers (72%). On derivatives markets, most exchanges coordinate their circuit breaker with their cash market (40%), followed by marketwide trading halts (20%) and volatility interruptions (13%). Most circuit breakers do not differentiate between upward and downward market movements. There is also support for greater coordination of circuit breakers across venues, and a few exchanges (32%) already coordinate their circuit breakers with other venues. <b>TOPICS:</b>Exchanges/markets/clearinghouses, global

Revisiting the determinants of futures contracts success: the role of market participants

AbstractThe Chicago Mercantile Exchange introduced a futures contract for distillers’ dried grains (DDGs) in early 2010, but the market became inactive only four months after its inception. While many new futures contracts do not develop into high‐volume traders, interest from DDG cash market participants indicated that this contract could be successful. Prompted by the unexpected lack of trading activity in this new futures market, we empirically revisit the question of what factors contribute to a futures contract's success and extend the literature by investigating the roles of market participants and the significance of supporting futures markets. Estimation results indicate that the market participant type—hedger or speculator—affects futures contract trade volume. More importantly, we find that the viability of new futures contracts for commodities that are jointly produced with other commodities is impacted by hedgers’ trade volume of the related futures contract. These results provide important additions into the portfolio of indicators used by commodity exchanges to more cost‐effectively evaluate new futures contract products.

Demonetization: Unpacking the Digital Wallets

On Nov. 8, 86% of India's currency was nullified in a great demonetization effort that aimed to clean out the black market's cash supply and counterfeit notes which completely disrupted the social, political, and economic spheres of the 'worlds second largest emerging market. All 500 and 1,000 rupee notes were instantaneously voided, and a 50 day period ensued where the population could redeem their cancelled cash for newly designed 500 and 2,000 rupee notes or deposit them into bank accounts. India has done this before. In 1946, all 1,000 and 10,000 rupee notes were recalled. In 1978, 1,000, 5,000, and 10,000 rupee notes were demonetized. In the days following Modi's announcement, the banks didn't have enough of the newly designed banknotes on-hand to distribute in exchange for the cancelled notes, and there simply wasn't an adequate supply of smaller denominations in circulation to run the cash economy. This could be the opportunity for e-wallet, companies to flourish and increase their customer base. For safe and fast transactions e-wallet are emerging as an alternative to cash.

أساليب المصرف المركزي الماليزي المالية في إدارة السيولة مع المصارف الإسلامية : دراسة فقهية تطبيقية = Financial Methods of Malaysian Central Bank for Liquidity Management with Islamic Banks : Applied Juristic Study

This research studies the experiment of Malaysian Central Bank for Liquidity Management. The research was divided into an introduction to the definition of liquidity and its management and two main sections; namely: The First Section: liquidity management by deposits and Mudarabah (a kind of commercial activity) among banks; which includes three subjects; first: introduction to cash market among banks second: liquidity management by Mudarabah among banks third: liquidity management by deposits among banks. The Second Section: circulation of money market instruments; which includes six subjects: the first: definition of money market instruments; the second: liquidity management by government investment issues; the fourth: liquidity management by Islamic Malaysian Treasury Bills; the fifth: liquidity management by lease warrants of Negara Bank; the sixth: liquidity management by Cash Bonds.

HOW EFFECTIVE IS FUTURES AS AN INSTRUMENT OF HEDGING AGAINST PRICE RISK? -A STUDY BASED ON SPOT AND FUTURE PRICES OF GOLD

This paper examines the role of commodity futures market as an instrument of hedging against price risk. Hedging is the practice of offsetting the price risk in a cash market by taking an opposite position in the futures market. By taking a position in the futures market, which is opposite to the position held in the spot market, the producer can offset the losses in the latter with the gains in the former. Both static and time varying hedge ratios have been calculated using VECM-MGARCH model. Variance of return from hedge portfolio has been found to be low. Further hedging effectiveness has been observed to be around 12%.

Growth of India's Equity Derivatives Market: An analytical study (2000-2015)

This paper explores the exponential growth of equity derivatives market in India. Equity F&amp;O segment on the nation's stock exchanges recorded a turnover 15 times of the cash market in 2014-15.The total turnover in equity derivatives market rose by 59.7 % when compared to 2013-14. This paper traces the growth and present status of India's equity derivatives market. It further attempts to infer reasons for this phenomenal growth from extant literature and secondary data sources.

PRICE DISCOVERY AND VOLATILITY TRANSMISSION IN AUSTRALIAN REIT CASH AND FUTURES MARKETS

This study examines the price discovery function and volatility spillovers in australian real estate investment trust (A-REIT) index futures and also investigates the effects of the global fi- nancial crisis (gfc) on these two features. as opposed to the general understanding of the relationship between the cash and the futures markets, the current study finds that the A-REIT cash market led the a-reIt futures market in price discovery and volatility transmission processes before the gfc. However, during the GFC, the two markets interacted bilaterally in terms of information flow, i.e., in- formation flowed in both directions. Furthermore, after the GFC, the futures market followed the cash market again, but less closely. These findings have broad implications for investors in property assets.

Overnight Trading and Price Discovery over the Course of a Trading Day: Evidence from Stock Index Futures in Korea

AbstractThis paper investigates the effect of overnight trading on the price discovery process over the course of a trading day in the Korean stock index futures market. The paper uses Trade and Quote data on nearest‐to‐maturity KOSPI 200 futures contracts from 2 January 2009 to 31 March 2011 and finds the following results. We find evidence that overnight trading contributes significantly to price discovery and, as a result, accelerates the process, and improves the efficiency, of price discovery. We also find evidence that 26.27% of the entire day's price discovery occurs during overnight trading by impounding private information as well as public information. Altogether, our results provide insights that the futures market serves as a price discovery vehicle for the cash index where the cash market closes, and that futures trades during overnight trading play an important role in price discovery, as they aggregate investors' private information about the fundamental values of the cash index.

Price Discovery and Foreign Participation in Korea's Government Bond Futures and Cash Markets

This paper examines the impact of foreign participation in Korean Treasury Bond (KTB) futures and its role in price discovery, using daily transactions data from the over‐the‐counter market and from the Korea Exchange for the futures. Our analysis suggests that foreign trading in the KTB futures market leads the price discovery process for the underlying bonds. Empirical results show that foreigners’ daily net long positions in the futures market exert significant influence in KTB and KTB futures prices. We also find that it is the unexpected component of foreign investors’ net long futures positions that explains a significant share of the pricing effects. Our empirical results also suggest that information transmission between cash and futures markets has improved significantly in the crisis and post‐crisis period while local market participants have become better in extracting information content from market transactions. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:23–51, 2017

Timing the stock market: Does it really make no sense?

Many private and institutional investors attempt to time the market and generate abnormal returns by periodically switching their portfolio allocations between the stock market and the cash market based on their return predictions. However, most academic studies emphasize that a successful market timing strategy requires a prediction accuracy that is usually not observable in reality. While prior studies evaluate the outcomes based on traditional return and risk measures, we adopt both expected and non-expected utility models to compare market timing with common benchmarks. Our analyses are based on a “simulated market timer” that does not require a specific forecast model. Bootstrap-based simulations show that even with low hit ratios, investors with non-expected utility preferences can consider market timing as highly desirable. The attractiveness of market timing is also partly attributable to short-termism in performance evaluation.

Market Efficiency and Price Discovery in Cocoa Markets

ABSTRACTThis paper tests the efficiency and price discovery mechanism in the cocoa cash and futures markets over the period March 1981–August 2009. The results indicate that the price discovery is done in the cash market and spreads to the futures markets and that the futures price can be seen as an unbiased predictor of future cash prices. There is no sign of a risk premium in the futures price. Since the cash behaves like a random walk we cannot reject market efficiency.

Earnings Announcements and Systematic Risk

ABSTRACTFirms scheduled to report earnings earn an annualized abnormal return of 9.9%. We propose a risk‐based explanation for this phenomenon, whereby investors use announcements to revise their expectations for nonannouncing firms, but can only do so imperfectly. Consequently, the covariance between firm‐specific and market cash flow news spikes around announcements, making announcers especially risky. Consistent with our hypothesis, announcer returns forecast aggregate earnings. The announcement premium is persistent across stocks, and early (late) announcers earn higher (lower) returns. Nonannouncers' response to announcements is consistent with our model, both over time and across firms. Finally, exposure to announcement risk is priced.

Fragmentation vs. Consolidation in Spanish Stock Exchange. A Note

After the implementation of MiFID (I and II), competition is a reality in all the European Cash Markets. A natural consequence of competition is that order flow is fragmented in different type of venues. This paper focuses on the consequences of fragmentation on the local market liquidity of the Spanish Stock Exchange (hereafter SSE). Our main result shows that, for our sample, fragmentation is relevant determining the cost of liquidity. Following the analysis of Degryse, de Jong and van Kervel (2014), the linear component of fragmentation has a positive and significant effect on liquidity (reduces spreads and increases Kyle’s Lambda) and the quadratic term has a negative and significant effect on liquidity (increases spreads and reduces Kyle’s Lambda). So, fragmentation is good for liquidity but beyond a given level of fragmentation, increasing it is worse for the liquidity of the regulated market.

Profitability of Short Term Reversal Strategies on the Johannesburg Stock Exchange

Short term reversal strategies involve the frequent buying (or selling) of l oser (or winner) stocks in order to profit in the short run if prices revert. Several studies report profitability of these strategies while others reject profitability due to trading costs. This study reports profitability of a short term reversal rule when trading in large capitalization Johannesburg Stock Exchange listed stocks, while allowing for trading costs and taking trade execution skills into account. Evaluation of the performance of the rule is done in terms of newly introduced reward and risk measures based on daily cash flows and market exposures respectively.

Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies

During most of 2005-10, the price of expiring U.S. corn, soybeans, and wheat futures contracts settled much higher than corresponding delivery market cash prices. Because futures contracts at expiration are commonly thought to be equivalent to cash grain, this commodity price non-convergence appeared inconsistent with the law of one price. In addition, sustained non-convergence concerns market participants, exchanges, and policymakers because it can make hedging less effective, send confusing signals to the market, threaten the viability of a contract, and ultimately lead to a misallocation of agricultural resources. This report summarizes prominent theories that have been offered to explain non-convergence, including a new model that explains how the structure of a competitive delivery market can generate a positive expiring basis. The data support this delivery market theory over alternative explanations. Finally, we discuss various policy levers that have been offered to address non-convergence, as well as their likely impacts.

An analysis of euro area sovereign CDS and their relation with government bonds

Abstract We compare the market pricing of euro area government bonds and the corresponding Credit Default Swaps (CDSs). In particular, we analyse the “basis” defined as the difference between the premium on the CDS and the credit spread on the underlying bond. Our sample of weekly data covers the period from January 2007 to December 2012 and contains several episodes of sovereign market distress. Overall, we observe a complex relationship between the derivatives market and the underlying cash market characterised by sizable deviations from the no-arbitrage relationship (i.e. basis equal to zero). We show that short-selling frictions explain the persistence of positive basis deviations while funding frictions explain the persistence of negative basis deviations which are observed for countries with weak public finances. Moreover, we show that the “flight-to-quality/liquidity” phenomenon in bond markets is a key driver of the large positive basis of better rated countries.

A Phasewise Empirical Analysis of Relationship between Indian Spot and Future Prices of Gold

The study investigates the relationship between the spot and the futures prices of gold commodity. The objectives of the study are examined by employing Chow test to check structural break points in prices data, ADF test to check the stationarity, Johansen Co-integration test for studying the long term relationship, and Granger causality Wald test to know the cause and effect relationship between spot and the future prices of gold. The daily closing data is taken from 1st May 2005 to 31st December 2012 for the analysis. Since the period of financial crisis is considered, the entire period (May 2005- December 2012) is divided into three sub-periods, namely before crisis period (May 2005-August 2008), during crisis (September 2008- December 2010) and after crisis period (January 2011- December 2012). The findings of the study proved that there are structural break points in the specified data and the series derived from the futures prices and cash market prices for gold were not stationary in the level form, but there is evidence of stationarity in the first difference form. Long run relationship between the spot and future price series is also observed. Empirical results also found the existence of uni-directional causality from spot return to futures return for before crisis and after crisis period. For the period during crisis, there is bi- directional feedback from futures return to spot return and from spot return to futures return.

Causality between Indian Futures and Cash Markets - Analysis with Granger Causality Block Exogenity Model

Causality between Indian Futures and Cash Markets - Analysis with Granger Causality Block Exogenity Model

Salesforce Acquisition? Looking Through the Patent Lens

The IT industry is known for its fair share of mergers and acquisitions. From acquiring nascent start-ups with a small revenue stream to those with a huge potential, the technology industry has seen it all. Be it WhatsApp’s $18 Bn acquisition or Nest for $3.2 Bn, the industry does only little not to surprise us. Running up to an acquisition demands ascertaining available cash flow, culture fit and market sentiments, among others. Most importantly, however, the strategic fit in technology should make sense. Salesforce has been in the limelight recently since it hired financial advisors, possibly to discuss an acquisition. This document attempts to look at the patent portfolios of possible contenders and compare them to the portfolio of Salesforce. At present, it is unclear as for which company among the top contenders this acquisition will make a strategic fit. It is also unclear which company among the possible bidders will actually move forward to acquire Salesforce, even if an acquisition were to happen. The top ones in line are: Oracle, IBM, SAP, Microsoft, HP Enterprise and Google. However, given the patent portfolio and technological overlaps, for some companies it makes more sense than for others. While we see that the acquisition could give a boost to Microsoft, for Oracle the assimilation might be far easier. Google could still surprise us as it has been known to acquire companies not belonging to its palette. For IBM the acquisition will be much out of its character. The same applies to SAP, who does not seem to have any interest in acquiring Salesforce. Nevertheless, the comparison of the patent portfolios of these companies is an interesting one and it presents the whole scenario of the possible acquisition of Salesforce in a different light for the readers.

Causality between Indian Futures and Cash Markets - Analysis with Granger Causality Block Exogenity Model

In India, spot market return, number of contracts, turnover and volatility of the futures market are having short run relationship with futures market return. On the basis of the empirical analysis it is clearly found that spot market is the key factor that predicts the movement of futures market and the trader can depend upon volatility and trading volume to take any decision on futures market trading. In precise, spot market return, volatility of the futures market, turnover and number of contract are the determinants of the futures market in India. Spot market return is the major determinants of the futures market, indeed variables from futures market itself like open interest and turnover of futures market can be taken into consideration for determining the futures market return. The empirical study is made with spot return, futures return, volatility of futures return, number of contract, trading volume and open interest of S&amp;P CNX Nifty and its underlying index Nifty -50 for the period 12th June 2000- 30th June 2011by applying the VAR Granger Causality/Block Exogeny Test. &nbsp;JEL Classification Code:&nbsp; G13