Single Stock Futures Research Articles

The Expiration Day Effects of Single Stock Futures : Evidence from Korea

In this study, we analyzed whether the expiration day effect of domestic single stock futures exists. One-minute stock prices and trading volume by trader types is used. Data ranges from May 2008 to June 2016. The expiration day effects are measured by price reversal, price shock, volatility effect, and volume effect. Since the expiration day of single stock futures is on the second Thursday of each month, we analyzed whether the expiration day effects differ between expiration Thursday and non-expiration Thursday. The price reversal effect is evident in Samsung Electronics and Hyundai Steel, and the price shock effect is evident for KT and KT&G. However, price reversals and price shocks are not generally found in other stocks. On the other hand, in most stocks (16 out of 22), the volatility effect variables were statistically significantly larger on the expiration Thursday than non-expiration Thursday. The expiration day effects of single stocks are evident in the trading volume. First of all, trading volume increased significantly on expiration Thursday than non-expiration Thursday. In particular, the trading-volume shares of institutional investors and foreign investors increase and the share of individual investors is decreasing. This suggests that the increase in trading volume on expiration Thursday is mainly due to the increase in the trading-volume shares of institutional investors and foreign investors, who are supposed to be in the information superiority. In addition, we can conjecture that the larger volatility level on expiration Thursday than on non-expiration Thursday may be due to institutional investors and foreign investors rather than individual investors.

Information Content of Implicit Spot Prices Embedded in Single Stock Future Prices: Evidence from Indian Market

This study examines the information content of pricing error, measured by the difference between the implied price computed using the cost of carry model and the spot price of Single Stock Futures (SSFs), traded on National Stock Exchange (NSE), India. The returns of portfolios, based on ranking of such pricing errors, are investigated. The consistency of results is verified by controlling for established risk factors, that is, market, size, value and momentum premium, and idiosyncratic factors such as firm’s liquidity and size. Our study reveals that the pricing error is a priced risk factor that contains incremental information about stock returns of day t, and not beyond. We conclude that implied spot prices from stock futures market are useful for traders to profit in the spot market. JEL Classification: G120, G130

Are single stock futures used as an alternative during a short‐selling ban?

The response of the single stock futures (SSF) market to a short‐selling ban is investigated. The hypothesis is that traders use SSF as a substitute instrument for short‐selling. A significant increase in SSF trading activity is documented, accompanied by narrower spreads. SSF market volatility did not react during the ban, which suggests that the increased trading activity did not weaken SSF market quality. The quality of the underlying market during the ban period is also assessed, with the results suggesting that changes in SSF market activity had neither positive nor negative effects on the stocks’ liquidity, volatility, and volume.

Single Stock Futures and Their Impact on Risk Characteristics of the Underlying Stocks: A Dynamic CAPM Approach

The concern regarding destabilizing ability of trading in futures markets in terms of increase in risk is still unresolved in developed and developing economies. This discussion also prevailed in Pakistan after the Global Financial Crisis (GFC). To investigates this concern with respect to Single Stock Futures (SSFs) and their impact on the underlying stocks, this study made use of data from 1999 to 2008. Speci cally, this study investigates the introduction of SSFs in relevance to their impact on the systematic and unsystematic risk of their counterparts. The statistical results of the study show that introduction of SSFs does not enhance the overall risk of the underlying stocks. Therefore, it can be concluded that SSFs cannot be blamed for any apparent volatility in the Pakistan Stock Exchange (PSX) at and before GFC. There could be some other reasons for change in risk level (accounting and macroeconomic fundamentals or industry speci fic etc.). The results of this study are in line with a category of earlier studies, which show that introduction of futures do not destabilize the underlying market. The study implies that flexible regulated futures markets can improve price discovery and liquidity of the market, while acting as an agent for hedgers.

Resumption of Single Stock Futures (SSFs) with Stringent Regulations and their Impact on the Risk Characteristics of the Underlying Stocks

During the stock market turmoil and later on in the year 2008, the Securities and Exchange Commission of Pakistan (SECP) suspended trading in futures products at the Karachi Stock Exchange (KSE) due to their proven destabilizing role in Global Financial Crises (GFC). On July 27th 2009, the Single Stock Futures (SSFs) were re-launched with stringent regulations for their trading in stock market. In this study, an attempt is made to identify changes in the volatility dynamics of underlying stocks after resumption of SSFs in KSE with tighter regulations than before and whether stringent regulations are justified or not. Specifically, the study decomposes volatility into systematic and unsystematic risk components and investigates the inherent changes in the underlying stocks' volatility subsequent to the resumption of SSFs. The findings suggest that the decrease in the systematic and unsystematic risk cannot be attributed to the firms' contract listing, but contemporaneous market, industry or macroeconomic changes. The findings may imply that stringent regulations are unjustified, which may reduce the liquidity and efficiency of the market and do no good to the market

The Impact of Single Stock Futures on Market Efficiency and Volatility: A Dynamic CAPM Approach

ABSTRACTThe concerns regarding regulations of futures markets and their destabilizing ability are unresolved in both developed and developing markets. Following stringent regulations of single stock futures (SSFs) for resumption episode after financial crises, this study addresses this concern and investigates the destabilizing impact of SSFs on the underlying stocks in an emerging economy using data of companies listed in the Karachi Stock Exchange between 1999 and 2008. Specifically, the study explores whether SSFs have caused a simultaneous increase in the volatility and operational efficiency of their underlying spot market counterparts. The results reported in the study show that the introduction of SSFs has no significant impact on market efficiency and volatility of SSFs underlying stocks and non-SSFs stocks. The results affirm that SSFs have, at least, no destabilizing impact on the underlying stocks.

A Study on Performance Evaluation of Indian Stock Market with special reference to NSE and BSE

The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. Along with this growth, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed several institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency, liquidity and safety. In a short span of time, Indian derivatives market has a place in list of top global exchanges. In single stock futures category, the Futures Industry Association placed NSE in second position in the year 2000. This study discusses about the performance of NSE and BSE in India and suggestions to improve their performance.

Setting the futures margin with price limits: the case for single-stock futures

Price limits are artificial boundaries established by regulators to establish the maximum price movement permitted in a single day. We propose using a new censoring method that incorporates the effect of price limits on the futures price distribution and investigates how to set an appropriate daily margin level using single-stock futures in Taiwan. We compare our estimations with those obtained using the method in Longin (J Bus 69:383–408, 1999). The results show that (1) the margin levels derived from the Longin method, which ignore price limits in the estimation, are lower than those in our censoring method; and (2) the legal margin for single-stock futures set at 13.5 % by the Taiwan Futures Exchange to avoid default risk appears to be too high.

Interaction Between Single-Stock Futures and the Underlying Securities: A Cross-Country Analysis

We investigate the price discovery mechanism among the single-stock futures (SSFs) and underlying stock markets in four emerging organized markets: India, Korea, Poland, and Russia. We find that the contribution of the SSF market to price discovery is, on average, 47 percent when utilizing daily data and 36 percent when utilizing intraday data. We further find that according to our cross-sectional analysis, spot market turnover, spot market capitalization, and age of the futures contract affect the role of SSF in the price discovery process.

Limits to Arbitrage: The Case of Single Stock Futures and Spot Prices

Market frictions such as transactions costs, funding constraints and short selling constraints limit arbitrage, but these frictions affect different stocks differently. Using intraday data on a liquid single stock futures and spot market, we examine the effect of these frictions on arbitrage efficiency of the two markets. We find evidence of significant cross-sectional variation in the size and asymmetricity of no-arbitrage bands. To the extent that market frictions affect all stocks similarly, commonality in the size of no-arbitrage bands is expected. We find that 17% of variation in the size of no-arbitrage bands is explained by the first principal component. Changes in funding liquidity is a key factor that determines variation in the common component.

Intraday price discovery and information sharing between stocks and single stock futures: evidence from India

This study examines the intraday price discovery and information sharing relationships between the constituent 50 stocks of the CNX Nifty Index and their corresponding single stock futures. Hasbrouck (1995) and Gonzalo and Granger (1995) methodologies are applied to price series observed at five-minute intervals to examine information sharing and price discovery functions. It was found that the cash market has a higher information share in 28 stocks, and the futures market has a higher information share in 22 stocks. The implication of these findings is that both the cash market and the futures market play an important role in absorbing information into prices and sharing with the associated market. The findings also indicate the presence of informed investors in both the cash and the futures market in India.

Single stock futures quotations as a forecasting tool for stock prices

Single stock futures quotations as a forecasting tool for stock prices

Short Sale Constraints and Single Stock Futures Listings

This paper exploits the unique experimental setting created by nearly 1,300 single stock futures listings on the OneChicago exchange between 2003 and 2009, to investigate the impact of derivatives introductions on the tightness of short sale constraints facing their underlying assets. After controlling explicitly for supply and demand conditions in the stock lending market, this experiment reveals a precipitous decline in loan fees and in active utilization rates in the lending market, subsequent to the futures introductions. The evidence supports the view that derivatives provide a viable alternative short selling venue and that they relax short sale constraints facing their underlying assets.

개별주식선물을 이용한 시스템트레이딩 헤징전략의 성과분석

We investigate the hedging effectiveness of incorporating single-stock futures into the corresponding stocks. Investing in only stocks frequently causes too much risk when market volatility suddenly rises. We found that single-stock futures help reduce the variance and risk levels of the corresponding stocks invested. We use daily prices of Korean stocks and their corresponding futures for the time period from December 2009 to August 2013 to test the hedging effect. We also use system trading technique that uses automatic trading program which also has several simulation functions. Moving average strategy, Stochastic's strategy, Larry William's %R strategy have been considered for hedging strategy of the futures. Hedging effectiveness of each strategy was analyzed by percent reduction in the variance between the hedged and the unhedged variance. The results clearly showed that examined hedging strategies reduce price volatility risk compared to unhedged portfolio.

The Price and Volume Effect of Single-Stock Futures Trading on the Pakistani stock market

The advent of single-stock futures (SSFs) provides an opportunity to investigate the company-wide impact of futures trading rather than the market-wide response captured through index futures contracts. This study analyzes the price and volume effect of SSFs on the underlying spot market based on a sample of 26 Pakistani firms. The dataset used includes one-year pre- and post-event data on closing prices and trading volumes. We conduct an event study in which the abnormal returns of individual companies and average abnormal returns reveal that futures trading has very little impact on the underlying spot returns. The cumulative abnormal returns show that statistically significant positive abnormal returns are experienced after SSF trading but with negative returns in the pre-event period. We compare pre- and post-event average normalized volumes using the t-test and dummy variable regression; the trend coefficients show a general decrease in trading volume. Consequently, there is an increase in returns and decrease in trading volume post-SSF trading in the Pakistani market.

High Frequency Manipulation at Futures Expiry: The Case of Cash Settled Indian Single Stock Futures

Futures markets are known to be vulnerable to manipulation, and despite the presence of a variety of mechanisms to prevent such manipulation, instances of market manipulation have been found in some of the largest and most liquid futures markets worldwide. In 2013, the Securities and Exchange Board of India identified a case of alleged manipulation (in September 2012) of the settlement price of cash settled single stock futures based on high frequency circular trading. As is well known, it is easy for any well-endowed manipulator to manipulate the price; the real challenge for the manipulator is to make the manipulation profitable. The use of high frequency circular trading of the form alleged in the SEBI order makes many forms of manipulation profitable, and makes futures market manipulation a much bigger problem than previously thought. As argued by Pirrong (2004), it is more practical to detect and punish manipulation than to try and prevent it. We develop an econometric technique that uses high frequency data and which can be integrated with the automated surveillance system to identify suspected cases of high frequency manipulation at futures expiry. We then use these techniques to identify a few suspected cases of manipulation. Needless to say, human judgement needs to be applied to decide which, if any, of these cases need to be taken up for investigation (and, after that, possible prosecution). This judgement is beyond the scope of our paper, and we refrain from making any judgement on whether any of the identified cases constitutes actual market manipulation.

Valuing put options on single stock futures: Does the put-call parity relationship hold in the South African derivatives market?

This study attempts to determine whether mispricing of options on single stock futures is present in the South African derivatives market. The valuation of options on single stock futures is considered through the put-call parity relationship. The theoretical fair values obtained, are compared to the actual market values over a period of three years, that is, from 2009 to 2011. Only put options are considered in this research.The results show that arbitrage put option opportunities do present themselves for the chosen shares. The actual put options were found to be underpriced in 5 out of 6 (83%) of the cases considered over the evaluation periods chosen. The mispricing was significant for both the BHP Billiton options with 100% and in the case of Sasol options (66%) of the time. Whether profitable arbitrage opportunities is possible, will depend on the magnitude of the mispricing and the transaction fees payable. Further, more extensive research may help identify tendencies which may be of use for the formulation of arbitrage strategies.

Valuing call options on single stock futures: Does the put-call parity relationship hold in the South African derivatives market?

This study attempts to determine whether this mispricing of financial derivatives is present in the South African derivatives market. This will be achieved by evaluating options for futures on individual stocks using a put-call parity ratio. The resulting theoretical fair value is compared with the actual market value for the three-year period (2009–2011). The results show that arbitrage opportunities are presented for selected stocks. Further research may include more stocks over a longer period to determine if there can be any model that can form the basis of an arbitrage trading strategy.

Modelling South African single-stock futures option volatility smiles

ABSTRACTThe process of producing an implied volatility surface in the absence of reliable and frequent trade data is difficult. Bakshi, Kapadia and Madan (2003) detail a methodology for relating an index option smile structure with that of one of its constituents. Here we exploit this work to derive the single-stock option smile as a function of the index smile and a regressed relationship between the two underlying assets. Our non-parametric approach allows the market to estimate where implied volatilities should trade for illiquid derivative contracts away from at-the-money. The derived smile does not admit spread arbitrage.

Single Stock Futures Trading and its Impact on Feedback Trading and Volatility: A Case Study of Pakistan

In this paper, we examine the possibility of an impact of the resumption of trading in Single Stock Futures (SSFs) on the dynamics (positive feedback trading and price volatility) of the underlying stocks in Pakistan’s market. Specifically, we test the hypothesis that trading in SSFs promotes or inhibits positive feedback trading in the spot market. Analyzing SSFs has several advantages over investigation of index futures. First, any impact of futures is more likely to be evident in the behavior of SSFs than index futures. Second, with SSFs it is possible to trade directly in the underlying stocks, and the endogeneity issue can be taken care of by using a relatively weighted portfolio of non-SSFs stocks. The findings of our study suggest that there is a statistically insignificant presence of positive feedback trading in both pre-SSFs period to post-SSFs period for both SSFs-listed stocks and a matching group of non-SSFs stocks. Furthermore, the unconditional volatility has significantly changed in both SSFs and non-SSFs, while asymmetry coefficient is statistically insignificant for SSFs but significant for non-SSFs. Overall our findings suggest that resumption of SSFs neither promotes nor inhibits feedback trading in the underlying spot market in Pakistan.