Futures Contracts Research Articles

Are global gold futures returns volatilities and trading activities threshold cointegrated?

Purpose This study aims to examine whether global gold futures returns volatilities and trading activities are threshold cointegrated. Design/methodology/approach This study considers 11 gold futures markets, including 3 developed futures markets and 8 developing futures markets. This study also analyzes futures trading activities for speculators and hedgers. This study uses a nonlinear threshold vector error correction model (TVECM) and a threshold Lagrange multiplier (LM) test proposed by Hansen and Seo (2002). Findings The findings show that global gold futures return volatilities (FRV) and trading activities are not always threshold cointegrated. Most developed futures markets exhibit threshold cointegrated of gold FRV and trading activities for speculators and hedgers, whereas some developing futures markets exhibit threshold cointegrated. It suggests that speculators and hedgers trading activity conveys valuable information about changes in market volatility dynamics. On the other hand, responses to error-correction effect among gold FRV and trading activities for speculators and hedgers are dramatically different for developed and developing gold futures markets, respectively, particular in the unusual regime. Research limitations/implications Research results show that threshold cointegration between global gold FRV and trading activities matters but not always. Thus, threshold relations have improved the authors’ understanding of global gold futures price discovery process with a threshold. For research limitations, this study uses only near month futures contracts, as it contains more information but not using far month contracts. Practical implications The findings may have important trading implications with additional insights in a(n) (un)usual regime further regulation may be detrimental to the price responsiveness in futures markets if increased price volatility and trading volume are attributed to liquid and efficient markets. Social implications The findings may have important policy implications with additional insights. For example, in a(n) (un)usual regime greater regulatory restrictions may be warranted to decrease market inefficiencies if increased price fluctuations are caused by increased trading volume. Policymakers could enhance futures trading liquidity or restrict speculating positions. Originality/value This study examines whether global gold futures returns volatilities and trading activities are threshold cointegrated by using a nonlinear TVECM. The authors detect that some global gold futures returns volatilities and trading activities are threshold cointegrated but some are not. Hence, the findings determine whether the volatility–volume threshold relation holds across countries and investigate the determinants of cross-country differences in different traders.

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.

Tracking Error and Portfolio of Futures ETFs According to Futures Contracts Maturity

Purpose - The purpose of this research is to confirm the tracking error of futures ETFs according to their portfolio weights with the most recent and next month’s maturity futures contracts. Design/Methodology/Approach - This research used futures indexes, futures contracts, ETF prices, and net asset value data of ETFs from the Fn Data Guide. Tracking error of futures ETFs, volatility, spread rate, and weight error variables were calculated from the data, and panel regression models from Hausman (1978) were used for empirical analysis. Findings - This research has two findings. First, the tracking error from D-3 (criterion: most recent maturity of futures contracts) to D-day (criterion: most recent maturity of futures contracts) was higher than the other trading days’ tracking errors. This is because the futures index is calculated with the most recent and next month’s maturity futures contracts, and the weight is different. Second, if the weight error between the most recent month’s maturity and next month’s maturity futures contracts is high in ETF portfolios, the tracking error is high. Research Implications - The results from the empirical analysis are as follows. When portfolio managers in futures ETFs do not adjust the futures contract weights between the most recent month’s maturity and next month’s maturity exactly, the tracking error is high. Therefore, managers should reflect the weight of the portfolio exactly.

Analyzing Commodity Futures Using Factor State-Space Models with Wishart Stochastic Volatility

A factor state-space approach with stochastic volatility is proposed for modeling and forecasting the maturity structure of future commodity contracts. The proposed approach builds upon the dynamic 3-factor Nelson-Siegel model and its 4-factor Svensson extension and assumes for the latent level, slope and curvature factors a Gaussian vector autoregression with a multivariate Wishart stochastic volatility process. A computationally fast and easy to implement MCMC algorithm for the Bayesian posterior analysis is developed, which exploits the conjugacy of the Wishart and the Gaussian distribution. An empirical application to daily prices for contracts on crude oil with stipulated delivery dates ranging from one to 24 months ahead show that the estimated 4-factor Svensson model with two curvature factors provides a good parsimonious representation of the serial correlation in the individual prices and their volatility. It also shows that this model has a good out-of-sample forecast performance.

The Global Finical Crisis from an Islamic Point Of View

When the world economy suffered a new financial economic crisis, it uncovered to the world that there were major failures within the Industrial financial system and it was caused by a number of issues including the practice of interest and the terrible effect it has on the financial crisis events. Issues that will be discussed in this paper are Riba, Gambling, Uncertainty, Derivatives, Saucerization, Sell of debt, Creation of Money, and the Private “Personal” interests. However, the paper will focus on the Islamic financial system and the financial instruments which are based and designed in compliance with Shariah Rules and Regulations, whether if practicing Islamic banking would cause such a crisis to accrue. The Sukuk, of the Islamic mortgage-Backed securities (MBS), and Islamic future contract will be discussed in order to prove why using the Islamic Financial system is better to assure that this kind of global crisis doesn’t come to pass again.

Does online investor attention drive the co-movement of stock-, commodity-, and energy markets? Insights from Google searches

Online investor attention, measured by Google searches, may provide valuable information for the assessment of the co-movement between financial assets. In our empirical analysis, we draw upon an extension of the dynamic conditional correlation model and find that online investor attention is a statistically significant determinant of the time-varying correlations between stocks and gold-, silver-, crude oil-, and natural gas future contracts. Our results, relying on daily data over almost six years, contribute to our understanding of how online investor attention impacts the linkage between financial markets under different conditions. Taking a practical point of view, we demonstrate that the informational content of Google searches may marginally increase the hedging effectiveness of combined portfolios.

OIL COSTS AND PRICES: AN EMPIRICAL CAUSALITY ANALYSIS

This study analyzes the causal relationship between oil prices and production costs and their implication over hedging in production companies. Two different data sets have been used as a proxy for production costs: i) monthly product price index related to oil activities from the Bureau of Labour of Statistics; ii) yearly data obtained from reports of publicly traded oil companies. For the oil price, different future contracts of Brent (1M, 12M, 24M, 60M) have been explored. Based on Granger's definition of causality, and using the Toda-Yamamoto (1995) methodology, both causal directions have been tested. The results obtained indicate that oil prices (any term of the curve) Granger-cause production costs, and not the other way around (as it has been considered for many specialists) in any term of the curve.Keywords: Oil Price, Production Costs, Hedging, Granger Causality, Toda-Yamamoto JEL Classifications: Q41, Q47DOI: https://doi.org/10.32479/ijeep.10887

Financial derivatives and their role in financial decision An analytical study of the views of managers in a sample of private sector banks in the city of Erbil

The purpose: The research aims to know the role of financial derivatives of all kinds (options contracts, futures contracts, and swap contracts) in making financial decisions of all kinds (investment decisions, financing decisions and profit distribution decisions). The research problem was defined by asking questions centered on the nature of the relationship, influence and clustering between the research variables. A hypothesis scheme was designed for the research, and the main and subsidiary hypotheses emerged from it. The research followed a (descriptive - analytical) approach to achieve the research objectives. The research used the questionnaire form as a means to obtain the data. The research sample consists of managers in private banks in the city of Erbil, whose number is (127) managers in (46) banks in the field of research. The questionnaire form was distributed to (127) managers, and (110) valid forms were retrieved for analysis. In order to verify the validity of the hypotheses, it was subjected to multiple tests using the SPSS-V.22 statistical program. The research reached several conclusions, the most important of which is the existence of a positive and very good level of moral relationship between financial derivatives at the macro and partial level, as the stronger relationship between swap contracts and financial decisions. This indicates that the more private banks researched relied on financial derivatives, this led to improved levels of financial decisions. And among the most important suggestions is the necessity for the management of private banks to invent other financial tools that support their financial decision-making, and the research suggests the necessity to maintain the management of private banks on their financial position without collapsing and confusion.

Black Monday Redux, Negative Oil Futures Retrospective

This paper examines the historic drop in West Texas Intermediate (“WTI”) oil futures contracts that occurred on April 20, 2020 as a result of significant events occurring at that time. While price movements around this time were jarring and raised the specter of ‘broken markets’, in reality, the futures contracts did what they were supposed to do, including the potential for negative pricing, and the physical oil markets took the price swings in stride and adapted accordingly. On the other hand, a conflux of low trading liquidity on the day and relative position of remaining market participants, some of whom were not extremely well-versed in the underlying intentions and terms of crude futures contracts, especially as it relates to taking physical delivery, temporarily increased volatility of the May20 WTI crude futures contract on the day prior to settlement. Given the ongoing democratization of investing, the events that played out illustrate the concept of ‘caveat emptor’ and the need for pro-active education in addition to reasonable safeguards in investment products and platforms.

Do economic statistics contain information to predict stock indexes futures prices and returns? Evidence from Asian equity futures markets

This research examines the impact of local and international market factors on the pricing of stock indexes futures in East Asian countries. The purpose of this paper is to present a study of the significant factors that determine the major stock indexes futures’ prices of Hong Kong, Malaysia, Singapore, South Korea and Taiwan. This study first investigates the relationships between Hang Seng Index Futures, KLCI Futures, SiMSCI Futures, KOSPI Futures, Taiwan Exchange Index Futures and local interest rates, dividend yields, local exchange rates, overnight SP 10 years in-sample data are used for testing and developing the pricing models, and 1 year out-of-sample data is used for the purpose of verifying the predicted values of the stock indexes futures. Using simple linear regressions, local interest rates, dividend yields, exchange rates, overnight S&P500 and ATMI are found to have significant impact on these futures contracts. In this research, the next period close is predicted using simple linear regression and non-linear artificial neural network (ANN). An examination of the prediction results using nonlinear autoregressive ANN with exogenous inputs (NARX) shows significant abnormal returns above the passive threshold buy and hold market returns and also above the profits of simple linear regression (SLR). The empirical evidence of this research suggests that economic statistics contain information which can be extracted using a hybrid SLR and NARX trading model to predict futures prices with some degree of confidence for a year forward. This justifies further research and development of pricing models using fundamentally significant economic determinants to predict futures prices.

Dynamic Trading, Imperfect Competition and Forward Contracts

Why do traders trade forward and future contracts on assets they could buy or sell directly? I provide an equilibrium model in which this can occur both for hedging, and for manipulation. By delaying trade to mitigate price impact, buyers (sellers) face the risk that the price unexpectedly increases (decreases) due to a supply shock. Futures with maturity shorter than traders' horizon would allow them to share this risk. However, once futures are introduced, traders also want to manipulate futures payoff: futures buyers want to buy the asset at futures maturity to raise the spot price, and conversely for sellers. Trading patterns are opposite futures are used for hedging or for manipulation: with hedging, spot sellers (buyers) also sell (buy) futures and hold inventory for longer, while with manipulation, spot sellers (buyers) buy (sell) futures and liquidate inventory more quickly. In equilibrium, manipulation dominates, and at least for some parameter values, futures decrease welfare.

Investment and Margin Risk Analysis of Robusta Coffee Futures Contract at Jakarta Futures Exchange

Futures trading is developing rapidly in various countries and has become one of the supports for economic growth. However, studies on investment in futures contracts in Indonesia, particularly in measuring risk are still limited. This study aims to calculate the maximum potential loss on investment and the estimated margin on robusta coffee futures at JFX using Value at Risk (VaR). The analysis used symmetrical and asymmetric GARCH (Exponential-GARCH, Threshold-GARCH, and GJR-GARCH). It used data of robusta coffee price, covering spot prices, March contract prices, and September contract prices for the 2016-2019 period. The result of the study indicates that the GARCH (1,1) is the most suitable model for the three robusta coffee prices. Based on the VaR value, the investment risk in the robusta spot is higher than the robusta contract. The margin value interval that may be applied to JFX robusta coffee based on spot price analysis, March contracts, and September contracts reach 2.39%-2.91%.

УДОСКОНАЛЕННЯ ІНФРАСТРУКТУРИ РИНКУ Ф’ЮЧЕРСНИХ КОНТРАКТІВ НА СІЛЬ-СЬКОГОСПОДАРСЬКУ ПРОДУКЦІЮ ДЛЯ УПРАВЛІННЯ ФІНАНСОВИМИ РИЗИКАМИ

The article examines how the infrastructure of the futures market is being improved for agricultural products. It is proved that the regulation of the exchange market of agricultural products should include protection of the integrity of market prices, as the damage caused to the market is not limited to the loss of its direct participants, to maintain confidence, and confidence in the market for risk management makes it impossible to circumvent tax restrictions. It is determined that the components of an efficient infrastructure function harmoniously and smoothly. It is substantiated that an important problem of the exchange market infrastructure is the limited accredited elevators, which prevents the use of futures on agricultural products as a hedging tool. It is outlined that the infrastructure of the futures market for agricultural products largely depends on the infrastructure of the grain market as a whole, which is currently in poor condition. The current state of infrastructure and logistics of the grain market is highlighted and substantiated that a qualitative change in the current situation requires large-scale moderni-zation, reconstruction and construction of new facilities at all stages of agricultural production. The purpose of this study is to improve the infrastructure of the market of futures contracts for agricultural products to manage financial risks and prospects for their further development. Methods. The basis of the study is the current legal framework, legislation, regulations, instruct-tional materials, textbooks, special literature. The article used general scientific methods of analysis and synthesis, specific methods of analysis: grouping, comparison, systematic and others. Results. Based on the study, it is proved that the infrastructure of the futures market for agricul-tural products is a set of organizations and institutions that help this market to work effectively and should be inextricably linked with the commodity exchange. It is also studied and determined that the market infrastructure, as a system of institutions and organizations (banks, exchanges, fairs, insurance companies, consulting and information and marketing firms, etc.), providing free movement of goods and services in the market. Keywords: market infrastructure, futures, futures contracts, financial risks, financial risk management.

Smart Futures Based Resource Trading and Coalition Formation for Real-Time Mobile Data Processing

Collaboration among mobile devices (MDs) is becoming more important, as it could augment computing capacity at the network edge through peer-to-peer service provisioning, and directly enhance real-time computational performance in smart Internet-of-Things applications. As an important aspect of collaboration mechanism, conventional resource trading (RT) among MDs relies on an onsite interaction process, i.e., price negotiation between service providers and requesters, which, however, inevitably incurs excessive latency and degrades RT efficiency. To overcome this challenge, this article adopts the concept of futures contract (FC) used in financial market, and proposes a smart futures for low latency RT. This new technique enables MDs to form trading coalitions and negotiate multilateral forward contracts applied to a collaboration term in the future. To maximize the benefits of self-interested MDs, the negotiation process of FC is modelled as a coalition formation game comprised of three components executed in an iterative manner, i.e., futures resource allocation, revenue sharing and payment allocation, and distributed decision-making of individual MD. Additionally, a FC enforcement scheme is implemented to efficiently manage the onsite resource sharing via recording resource balances of different task-types and MDs. Simulation results prove the superiority of smart futures in RT latency reduction and trading fairness provisioning.

Optimal hedge ratios and hedging effectiveness: An analysis of the Turkish futures market

The main purpose of this comprehensive study is to determine the optimal hedge ratios and hedging effectiveness of different futures contracts traded on the Borsa Istanbul (BIST), namely the BIST 30 equity index, US dollar–Turkish lira currency futures (USD-TRY), euro–Turkish lira (EUR-TRY) currency futures, and gold futures. The efficiency of hedge ratios estimated through constant and time-varying econometric models, such as ordinary least squares (OLS) and diagonal VECH—a multivariate generalized autoregressive conditional heteroskedasticity (GARCH) model—are compared with a minimum variance hedge ratio framework. The periods before and after the merger of the Turkish Derivatives Exchange are analyzed with the models to capture changes in the hedging effectiveness of the contracts. We find that the diagonal VECH and constant models produce almost identical positive results for both periods, suggesting similar high hedging effectiveness for BIST 30 equity futures contracts. We conclude that BIST 30 equity futures contracts provide an efficient hedging mechanism for investors aiming to protect their spot equity portfolios. However, after Turkey's foreign exchange regulation amendment in 2017, the percentage of variance reduction improves greatly for the dynamic GARCH model, compared to the static OLS model, for USD-TRY and EUR-TRY futures contracts. Furthermore, the hedging effectiveness of currency futures contracts is negatively affected during the COVID-19 pandemic period beginning in 2020. Unlike other contracts, the hedging effectiveness of gold contracts is low in all periods.

Biodiesel hedging under binding renewable fuel standard mandates

We apply an encompassing framework to assess the viability of hedging spot biodiesel price risk for four U.S. markets with a conventionally used heating oil futures contract and a soybean oil futures contract based on the logic that supply shifts (i.e., price of soybean oil as an input) drive biodiesel prices when binding blending mandates are in place. Results indicate that soybean oil futures should in fact be part of a composite hedge, and that in some instances greater hedging weight should be placed on the soybean oil futures contract than the conventionally used heating oil futures contract. • Biodiesel price risk is often hedged with heating oil futures, since biodiesel substitutes for heating oil in diesel blends. • But binding renewable fuel standard mandates imply biodiesel price is driven by that of the primary input—soybean oil. • An encompassing framework compares effectiveness of both futures contracts and a composite hedge combining them. • Results favor a composite hedge with greater weight often placed on soybean oil than on heating oil futures contracts.

Pareto efficient buy and hold investment strategies under order book linked constraints

This paper deals with a multiobjective portfolio selection problem involving expected wealth (or return), coherent risk measures, deviation measures, and “level II order book data”, i.e., natural restrictions provoked by the existence of several levels of both bid and ask quotes with the corresponding depth. Obviously, the incorporation of the order book information makes our study much more realistic, since it is more closely related to the real behavior of many financial markets. Besides, ambiguity may be incorporated, which allows us to overcome the model-risk, since a potential discrepancy between the real (and maybe unknown) probabilities and the estimated ones is taken into account. Though the portfolio choice problem is not at all linear, its dual problem becomes a linear goal programming problem, and, consequently, the absence of duality gap allows us to solve the portfolio choice problem in an easy way. Furthermore, the double dual problem is linear too, and its solution also leads to the Pareto-efficient frontier. Lastly, we explore the influence on the Pareto-efficient frontier of the existence of “golden strategies”, i.e., investment strategies whose tail (or downside) risk is strictly lower than their price. Numerical experiments involving all the findings are implemented in a derivative market where both future contracts and call/put options may be traded.

Notional Value Effect in Futures Markets

We examine how the notional value of futures contracts predicts the cross-section of returns within the major asset classes tracking a large number of futures contracts. We find that low notional value contracts outperform high notional value contracts within government bonds, short-term rates, commodities, currencies, and equity indexes. A diversified portfolio of the strategy delivers abnormal returns after controlling for standard asset pricing factors. The strategy is related to value and reversal factors but their explanatory power is low. Differences in liquidity explain a large portion of the cross-section of notional value, where high notional value contracts are more liquid, and subsume the reversal and value factors. Volatility risk can be a partial explanation both cross-sectionally where low notional value contracts exhibit higher volatility and across time where shocks to market volatility decrease strategy returns.

Speculation and returns' volatility: Evidence from Pakistan Mercantile Exchange

The debate about the role of speculators in commodity markets has been intensified after the financialization. The current study augments the empirical evidence related to speculators and their impact on volatility of commodity markets. In doing so, the study uses daily data between 12th November 2009 to 30th April 2020 for oil and gold future contracts from Pakistan Mercantile Exchange. The findings suggest that speculative activity positively and significantly affects the returns' volatility. These findings support the destabilizing hypothesis, which argues that speculators create distortions in commodity markets. The findings have important implication for market participants (e.g., absence of welfare gain for hedgers) and regulators.

СТРУКТУРА ТА ЕФЕКТИВНІСТЬ ІНВЕСТИЦІЙ У СПОРТИВНУ ІНДУСТРІЮ КРАЇН (НА ПРИКЛАДІ ЕКОНОМІКИ НІМЕЧЧИНИ)

In the last thirty years sport is turning into business and football clubs are developing into large corporations. Sports industry has been becoming not just more exciting but also highly lucrative. The value of professional football sector is estimated to be about 8 billion euros. Even more investors see sports leagues or football clubs as profitable investments. For instance, European Super League can be taken, which could have been more profitable for investors than other competitions and attracted such sponsor as JPMorgan Chase. However, in the near future such project has no support from governments and other clubs and therefore has no future yet. One type of investment in the sports industry is the purchase of shares in sports clubs. Borussia Dortmund is a German football club, one of the most successful clubs in the world, which plays in the Bundesliga, the top tier of the German league system. Dortmund’s shares are listed on the Frankfurt Stock Exchange. Borussia is the only club in Germany and among approximately 25 clubs in the world, including few British and Italian clubs, whose shares are publicly traded. Even more clubs are considering going public to increase its capital. One of the biggest clubs in Belgium, Brugge examined such opportunity, though the club postponed their initial public offering because of the low demand. On the contrary, Ukrainian football club Veres started selling its shares in April 2021 and during the first day have received bids for the purchase of stocks for the amount of over 36 million hryvnas. However, the benefit for the investor might be only the increase of a share price as the club does not intend to pay out dividends. The article analyses the price of a club share for more than 20 years and historical dividends. Borussia’s stock is analysed using futures contracts. It also examines such indicators as return on invested capital (ROIC), weighted average cost of capital (WACC), return on assets (ROA), which are compared with those of Manchester United, Juventus, Lazio and Ajax. A model is being built to predict the stock price during COVID-19 and before the start of the pandemic to compare price fluctuations and model errors.