Government Bond Futures Research Articles

Detecting the risk of cross-product manipulation in the EUREX fixed income futures market

Cross-product manipulation involves manipulating one financial product to profit from the subsequent reaction in a different but related product. In this paper, we develop a simple model that researchers and regulators can use to scan for the susceptibility of two markets to such misconduct. We also test the model empirically on a set of government bond futures contracts using a complete EUREX ultra-high-frequency dataset. Our findings show that cross-product manipulation is feasible across bond futures with different underlying maturities, issuers and contract expiry dates. The results suggest that cross-product manipulation might be widespread despite an increasing crackdown by regulators and prosecutors.

Research on Abnormal Volatility in The Japanese Government Bond Futures Markets– Policy based on yield curve control

Historically, central banks in the United States, the United Kingdom, Australia and Japan have implemented Yield Curve Control (hereinafter referred to as YCC), and Japan is currently the only country in the world that is still pushing ahead with YCC. However, given that the implementation and implementation of the YCC showed more defects than profits, on June 15, 2022, there was an unusual fluctuation in the Japanese government bond futures market, Japan’s 10-year government bond future contracts fell by 2.01 yen, touching the melting point in the plate, the largest single-day drop in 2013. This article introduces the basic framework of the yield rate curve and its way of buying bonds, then elaborates on the operation of the Central Bank of Japan to buy bonds in 2022, analyses the abnormal fluctuations in the Japanese government bond futures market in 2022 and identifies the contradictions and limitations of the government bond market as the root cause of the fluctuation.

News implied volatility and aggregate economic activity: evidence from the Japanese government bond market

ABSTRACT Because options on 10-year Japanese government bond (JGB) futures are relatively new in the market, their implied volatility, JGB-VIX, is not available before 2007. For the period when JGB-VIX is available, we conduct supervised learning by using the daily newspaper articles as input and JGB-VIX as output. We then construct a new JGB market uncertainty measure, which we called JGB-NU, based on the predicted values of JGB-VIX from the estimated model and contents of the newspaper articles from 1981 to 2021. In the VAR analysis with JGB-NU, we confirm that JGB market uncertainty shocks have a negative impact on real economic activities in Japan.

Demand Shocks for Public Debt in the Eurozone

AbstractIn this paper we use intraday government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large negative movements in Treasury yields. Evidence shows significant spillover effects into Treasury bond, equity, and corporate bond markets of other eurozone countries. We find interesting differences in the effects of demand shocks between the two countries, consistent with the “safe‐haven” status of German bonds versus the “high‐debt” status of Italian Treasuries. Results suggest that these effects are stronger during periods of high financial stress.

The FOMC announcement returns on long-term US and German bond futures

• We examine the impact of FOMC announcements on long-term US and German government bond futures. • Using transaction-level data during the post–financial crisis period, we observe a sizable post-announcement drift in government bond markets. • A trading strategy yields up to four times the Sharpe ratio of buy-and-hold investment. • The post-FOMC drift coincides with more informative order flows in the post-announcement period. • Post-FOMC announcement drift in the government bond futures persists for 15 days. We examine the impact of monetary policy announcements by the Federal Open Market Committee (FOMC) on long-term US and German bond futures. Using transaction-level data during the post-financial crisis period, we observe a sizable post-announcement drift in government bond markets. A trading strategy of investing in the market after expansionary shocks and shorting the market following contractionary surprises yields up to four times the Sharpe ratio of buy-and-hold investment. The post-FOMC announcement drift coincides with more informative order flows in the post-announcement period, and it persists for 15 days. Moreover, our study shows an absence of pre-FOMC announcement drift. Our findings shed some light on how the bond markets react to public news arrival.

Volatility Indices and Implied Uncertainty Measures of European Government Bond Futures

Implied volatility and other forward-looking measures of option-implied uncertainty help investors carefully evaluate market sentiment and expectations. We construct several measures of implied uncertainty in European government bond futures. In the first part, we create new volatility indices, which reflect market pricing of subsequently realised volatility of underlying bond futures. We express volatility indices in both price and basis points, the latter being more intuitive to interpret; we document their empirical properties, and discuss their possible applications. In the second part, we fit the volatility smile using the SABR model, and recover option-implied probability distribution of possible outcomes of bond futures prices. We analyse shapes of the implied distribution, track its quantiles over time, calculate its skewness and kurtosis, and infer probabilities of a given upside or downside move in the price of bond futures or in the yield of their underlying CTD bond. We illustrate these complementary measures throughout the note using Bund futures as an example, and show the results for Schatz, Bobl, OAT, and BTP futures in the annex. Such forward-looking measures help market participants quantify the degree of future market uncertainty and thoroughly assess what risks are priced in.

Beyond Carry and Momentum in Government Bonds

This article revisits recent literature on factor investing in government bonds, in particular regarding the definition of value and defensive investing. Using techniques derived from machine learning, the authors identify the key drivers of government bond futures and the groups of factors that are most genuinely relevant. Beyond carry and momentum, the authors propose an approach to defensive investing that considers the safe-haven nature of government bonds. These two main styles may be complemented by value and a reversal factor in order to achieve returns independently from broad movements in interest rates. TOPICS:Analysis of individual factors/risk premia, factor-based models, style investing, fixed income and structured finance, big data/machine learning Key Findings • This article revisits recent literature on factor investing in government bonds, in particular regarding the definition of value and defensive investing. • Using techniques derived from machine learning, the authors identify the key drivers of government bond futures and the groups of factors that are most genuinely relevant. • Beyond carry and momentum, the authors propose an approach to defensive investing that considers the safe-haven nature of government bonds.

Demand Shocks for Public Debt in the Eurozone

In this paper we use high-frequency (intraday) government bond futures price changes around German and Italian Treasury auctions to identify unexpected shifts in the demand for public debt. Estimates show that positive demand shocks lead to large and persistent negative movements in Treasury yields. There is also evidence of significant spillover effects into Treasury bond, equity and corporate bond markets of other euro area countries. We find interesting differences in the effects of demands shocks between the two countries, which are consistent with the safe-haven status of German bonds versus the high-debt status of Italian Treasuries. Results also suggest that these effects are stronger during periods of high financial stress.

Beyond Carry and Momentum in Government Bonds

This article revisits recent literature on factor investing in government bonds, in particular regarding the definition of value and defensive investing. Using techniques derived from machine learning, the authors identify the key drivers of government bond futures and the groups of factors that are most genuinely relevant. Beyond carry and momentum, they propose an approach to defensive investing that considers the safe-haven nature of government bonds. These two main styles may be complemented by value and a reversal factor in order to achieve returns independently from broad movements in interest rates.

The impact of the US stock market opening on price discovery of government bond futures

AbstractWe examine price discovery in sequential markets for the 10‐year US Treasury note, German bund, and UK gilt futures over the period 2010–2017. We find that price discovery increases after the opening of the US stock market. Order flows in the bond futures markets are more informative for permanent price changes in the 30‐min period after the US stock market opens. A placebo test using US statutory holidays confirms our findings. A cross‐market analysis suggests that the increased price discovery in the bond futures is related to returns and net order flows of the US stock market.

Finding Value in Momentum

The paper applies momentum-based investment strategies, such as trend and reversal, on government bond futures. It thereby introduces an innovative yet simple approach to harvest time horizon diversification in the signal generation process. Signal diversification over multiple lookback windows enhances returns, independent of the signal aggregation algorithm (naive diversification, maximum diversification, average correlation, Ward distance, equal risk contribution, or principal component analysis). The paper builds two distinct strategies from the same aggregated input signals. The first, time-series momentum (TSMOM), uses time-series aggregation and the second, cross-sectional momentum reversal (XSREV), is calculated in a cross-sectional framework. Specifically, XSREV grounds on government bond pairs, an approach that has a longstanding history within the fixed income space. The paper states that government bond returns are highly correlated and driven by common global factors, which suggests that a reversal strategy is more suitable. Further analysis reveals that XSREV captures a cross-sectional value return factor. With its formulation of XSREV, the paper fills a void in the literature, as existing value measures in fixed income suffer from data quality issues.

Flight to 'Futures' During the Financial Crisis: Deliverability Through Central Counterparties

Taking advantage of the physical settlement of Japanese government bond (JGB) futures, this paper firstly evaluates the role of central counterparties (CCPs) in the over-the-counter market during the 2008-2009 financial crisis. Our result shows that the special premium on the settlements through CCPs clearly emerged only during the crisis and is significantly related to physical settlements through CCPs. To identify the premium, we compare 7- and 6.75-year JGBs, which generate almost the same cash flow except the linkage to CCPs through JGB futures. Our evidence strongly supports the recent financial regulation reforms which mitigate the counterparty risk through CCPs.

An Empirical Study on the Lead-lag Relationship between Five-year Chinese Government Spot Bonds and Futures Markets

This empirical study examines the short-term dynamic lead-lag relationship between five-year Chinese government bond futures index and its underlying spot index, using daily data from September 06, 2013 to August 31, 2016. We carry out unit root test, Johansen-Juselius cointegration test, Granger causality analysis, impulse response function analysis, and variance decomposition analysis. The empirical results of this paper reveal that five-year Chinese government bond futures and spot level variables are non-stationary time series data with unit root, but the first differences in the logarithm of the prices are stationary. As a result of the cointegration test, it was confirmed that there is no long-term equilibrium relationship between the two level variables (price). Lastly, the results of Granger causality, impulse response functions, and the variance decomposition analysis show that the returns of five-year Chinese government bond futures one-sidedly lead the underlying spot returns. This means that the five-year government bond futures market is more efficient in China. Also, these results are consistent with the results of previous studies, and are expected to be useful for traders, regulatory bodies and practitioners for several reasons, such as price discovery, hedging and arbitrage opportunities.

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

Tail Risk Concerns Everywhere

We show that the beta with respect to an index of global ex ante tail risk concerns (𝔾ℝ𝕀𝕏), which we construct using out-of-the-money options on multiple global assets, negatively drives cross-sectional return variations across asset classes, including international equity indices, foreign currencies, and government bond futures. The pricing power of 𝔾ℝ𝕀𝕏 becomes stronger when more asset-class-level tail risk concerns are incorporated in the index construction. 𝔾ℝ𝕀𝕏 also dominates asset-class-level tail risk concerns in pricing assets within each asset class. These evidences imply that the pricing effect of tail risk concerns works predominantly as a global channel. The 𝔾ℝ𝕀𝕏 pricing effect is distinct from that of tail risk factors based on historical realizations, consistent with the interpretation that tail risk concerns likely reflect investors’ ex ante subjective belief about tail risk. This paper was accepted by Neng Wang, finance.

Open-End Knock-Outs on Bond Futures: Valuation, Properties and Estimation of Hidden Profit Drivers

This paper is the first on retail Structured Financial Products (SFPs) from the fixed-income area, namely open-end knock-outs (OEKOs) on government bond futures. We develop and apply a valuation algorithm for OEKOs to analyze the issuers' profit. On the basis of a simple superhedging strategy we disclose the profit drivers for the issuers. The crucial profit drivers, the 'margin factor' and the 'rollover fee', are set by the issuers and can be regarded directly as costs to the investors. But even disregarding these drivers there exists a 'hidden' interest gain. However, asymmetric jumps in the interest rate dynamics may lead to significant gap risks which can considerably lower the issuers' benefit, even below zero. Since the crucial profit drivers of OEKOs are not directly observable, we estimate them by analyzing an extensive data set of OEKO prices. Inter alia, depending on the issuer we find that the profit drivers can take values of up to 60% p.a. on average.

Rise and Fall of the First Financial Futures Market in China: The Case of Chinese Government Bond Futures

AbstractThis paper studies the rise and fall of the first financial futures market in China. We compare the characteristics in the Chinese Government bond futures market with those in the US T‐bond futures market. They differ in market design and structure, market governance, margin requirements, position limits, delivery process, and the way in which the settlement price is calculated. Furthermore, with a unique dataset, we show that prior to maturities of government bond futures, traders began to accumulate significant amounts of long positions for several selected contracts without the intention to offset, forcing short position holders to either purchase deliverable bonds or offset futures at highly inflated prices, causing higher market volatility and price disequilibrium in both spot and futures markets. Arbitrage opportunity arises and the market eventually collapses. The lessons learned from the suspension of the Chinese Government bond futures market offer an invaluable learning experience.

Intraday Patterns, Announcement Effects, and Volatility Persistence in the Japanese Government Bond Futures Market

Following Bollerslev et al. (2000), this study characterizes the high-frequency volatility of the Japanese Government Bond (JGB) futures on the Tokyo Stock Exchange (TSE) in terms of intraday calendar effects, announcement effects and volatility persistence effects. The results indicate that, unlike the case for the US Treasury bond futures, only four out of 21 scheduled macroeconomic announcements are found to have a significant impact on volatilities, and their instantaneous and daily influences are rather small. At both instantaneous and daily frequencies, volatility persistence effects have the largest influence on volatility, while macroeconomic announcements have only a negligible impact.

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.

Short-Selling Restriction, Price Squeeze, and Bond Futures Price Manipulation: A Theoretical and Empirical Analysis

In an emerging futures market with short-selling restrictions on spot contracts, low margin requirements on futures contracts, and weak corporate governance, price squeeze and manipulation may occur. Price manipulators would be able to inflate both spot and futures prices and lead to the instability of the futures and spot markets. The Chinese government bond futures market, the first and the only financial futures ever existed in China, provides an opportunity to investigate the above conjecture. Using a unique data set including all contract series issued and traded between 1993 and 1995, this paper documents evidence of price squeeze and manipulation. Our evidence indicates that prior to the maturity month of government bond futures, price manipulators, taking the advantage of short-selling restrictions in the government bond spot market and very low margin requirements in the government bond futures, accumulate a significant amount of long positions for several selected issues without the intention to offset, which eventually leads to the collapse of the Chinese government bond futures market.