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Intraday futures patterns and volume-volatility relationships: The German evidence
Abstract
This paper examines the intraday behavior of 5-min DAX futures return volatility, volume and transactions, employing data from between January 1999 and September 2011, thus covering major market up and down trends. We focus on the interplay of the above variables finding a W-shape due to US macroeconomic news releases and the opening of US markets. By carefully modeling regular but infrequent events, we show that the last trading days of the FDAX and ODAX have significant impact on volatility and alter the intraday patterns. Additionally, we pay special attention to interactions between the futures and cash market caused by different trading hours at the Eurex. Thereby, we discover a uW-shape lending support for Daigler’s (J Futures Markets 17:45–74, 1997) extended market closure theory. Focusing on possible changes in the interplay of volume and volatility, we empirically analyze the implications of different volume–volatility theories. Finally, we model simultaneously the main volatility components—intraday calendar effects, macroeconomic announcement effects and interday volatility clustering—employing the framework of Andersen and Bollerslev (J Finance 53:219–265, 1998) to quantify and compare the impact of macroeconomic news announcements during contractions and expansions and focus on the economic impact of the crisis 2007/2008 on intraday volatility.
... Biswas and Rajib (2011) considered gold, silver and crude the oil futures of the MCX of India and their study supports the SIH for all three commodity futures. Zwergel and Heiden (2012) studied the German stock market and supported the existence of contemporaneous relation between the return and volume. Srinivasan et al. (2016) studied the Indian stock futures market by taking 25 stock futures contracts and found a positive relationship between return and volume of stock futures. ...
The study examines the mixture of distribution hypothesis (MDH) and the sequential information arrival hypotheses (SIH) in the base metal futures market of India. We use near-month futures daily trading data of price, volume and open interest for 7 years. It is downloaded from the official website of Multi Commodity Exchange (MCX), India. The study supports the MDH as it confirms the existence of a contemporaneous correlation between the return and change in volume of all base metal futures traded at MCX, India. The article exhibits no causality between the return and volume change of metal futures which supports the MDH and contradicts the SIH. This indicates a greater level of market efficiency. The study finds unidirectional causality between the return and daily change of open interest and bidirectional causality between the change in volume and change in open interest. This is found for all base metal futures and this aspect is left for in-depth analysis by the futures studies.
... Earlier research, such asZwergel and Heiden (2014) also shows that macroeconomic news releases are a major source of intraday volatility in financial markets.Content courtesy of Springer Nature, terms of use apply. Rights reserved. ...
This paper presents a quantitative approach to measure market efficiency based on the waiting-time distribution. We use the spread between two classes of ordinary shares of Royal Dutch Shell Plc, and two listings of Australia and New Zealand Banking Group Limited to observe market inefficient states. We find that the parameter of the waiting-time distribution provides a quantitative measure of the market inefficiency and can be used as a short-term market efficiency indicator. This approach can be applied to liquid financial markets and has clear implications for the investors, hedgers, regulators and policymakers.
The existing literature is still inconclusive on whether momentum exists and whether momentum strategy profits are affected by macroeconomic variables. The aim of the present study is two-fold. First, we examined the existence of the momentum by studying the strategy profits in six oil-rich developing countries in Middle East including Iran, Saudi Arabia, Bahrain, Qatar, the United Arab Emirates, and Kuwait using the double-sort strategies. Our findings show that there is a momentum profit over short-, mid- and long-term periods in all countries. After selecting the best combinations of information sets and holding lengths for each country, by adding the oil price and the exchange rate, and adjusting the models proposed by Chordia and Shivakumar (J Finance 57:985–1019, 2002) and Kim et al. (J Bank Finance 49:191–215, 2014) on the characteristics of oil-rich developing countries, we estimated the impact of macroeconomic variables on the expected momentum profits through a two-state Markov regime switching model under different distributions. The findings indicate that the momentum strategy profits can be explained by a set of lagged macroeconomic variables, especially oil prices and exchange rate. The results show that the winner portfolio has a greater sensitivity to macroeconomic variables than does the loser portfolio in both the expansion and recession states. It is also indicated that both the winner and the loser stocks are riskier in the expansion periods than recession periods. The results indicate that the returns on momentum portfolios react asymmetrically to economic conditions in the recession and expansion states.
From the point view of behavioral finance, market sentiment plays an important role in forecasting stock returns. How to accurately measure the impact of market sentiment is a challenge work. Two issues on nonlinear relationship and mixed-frequency data have to be addressed. To this end, we introduce methods of mixed-frequency data into SVRs and develop a novel (U)MIDAS-SVR model. It can be estimated by solving the Lagrange duality technique of quadratic programming. We then apply the (U)MIDAS-SVR model to predict weekly returns of SHSE and SZSE in China using the mixed-frequency market sentiment as covariates. The empirical results show that the (U)MIDAS-SVR model is promising and MIDAS-SVR is superior to those competing models in terms of MAE and RMSE. In addition, we design seven scenarios by considering different data source combinations and find that the multi-source market sentiment is helpful to improve forecasting performance on stock returns.
Using 1-min transaction data, this study investigates the relationship between volume and volatility in CSI 300 futures market in China. Unit root test indicates that return series are stationary. LB-Q and ARCH-LM statistics confirm volatility clustering and time-vary volatility. ARMA (2, 2)-EGARCH (1, 1) model find evidence of GARCH effect, and positive shocks have a greater impact on volatility than negative shocks. Furthermore, the coefficients of both contemporaneous and lagged volume are positive and significant statistically, indicate that volume as information flow indicators, may explain the volatility, Both MDH and SIA hypothesizes are verified in China. These findings have significant implications for the traders and policymakers.
We present a set of stylized empirical facts emerging from the statistical analysis of price variations in various types of financial markets. We first discuss some general issues common to all statistical studies of financial time series. Various statistical properties of asset returns are then described: distributional properties, tail properties and extreme fluctuations, pathwise regularity, linear and nonlinear dependence of returns in time and across stocks. Our description emphasizes properties common to a wide variety of markets and instruments. We then show how these statistical properties invalidate many of the common statistical approaches used to study financial data sets and examine some of the statistical problems encountered in each case.
This study empirically explores the nexus between inflation and economic growth in the context of Pakistan economy. Annual data for the period of 1960-2006 has been used. According to the results of the study, inflation is positively related with economic growth in Pakistan and vice versa. As for as, the concern of causality between these two variables, it is found to be uni-directed. In other words, inflation is causing growth but not vice versa. To examine the extent to which economic growth is related to inflation and vice versa, Error Correction Models (ECM) have been employed. With the help of this procedure, it is possible to examine the short-run and long-run relationship between two variables. The Error Correction Model (ECM) test is essential to see whether an economy is converging towards equilibrium in the short- run or not. According to the outcome of the study, inflation is away from its equilibrium value. For instance, the error correction term -0.49 implies that 49 percent of the adjustments towards the short-run equilibrium relation for Pakistan occur within a year through changes in growth rates. On the other hand, 58 percent (error correction term -0.58) of the deviation of the inflation from its short-run equilibrium level is corrected each year. Furthermore, the estimated threshold model suggest that 9 percent threshold level (i.e. structural break point) of inflation above which inflation starts to lower the economic growth in Pakistan. Pakistan must need inflation but in single digit for growth because too fast a growth rate may also accelerate the inflation rate.
One of the most noticeable stylised facts in finance is that stock index returns are negatively correlated with changes in volatility. The economic rationale for the effect is still controversial. The competing explanations have different implications for the origin of the relationship: Are volatility changes induced by index movements, or inversely, does volatility drive index returns? To differentiate between the alternative hypotheses, we analyse the lead-lag relationship of option implied volatility and index return in Germany based on Granger causality tests and impulse-response functions. Our dataset consists of all transactions in DAX options and futures over the time period from 1995 to 2005. Analyzing returns over 5-minute intervals, we find that the relationship is return-driven in the sense that index returns Granger cause volatility changes. This causal relationship is statistically and economically significant and can be clearly separated from the contemporaneous correlation. The largest part of the implied volatility response occurs immediately, but we also observe a smaller retarded reaction for up to one hour. A volatility feedback effect is not discernible. If it exists, the stock market appears to correctly anticipate its importance for index returns.
We present a set of stylized empirical facts emerging from the statistical analysis of price variations in various types of financial markets. We first discuss some general issues common to all statistical studies of financial time series. Various statistical properties of asset returns are then described: distributional properties, tail properties and extreme fluctuations, pathwise regularity, linear and nonlinear dependence of returns in time and across stocks. Our description emphasizes properties common to a wide variety of markets and instruments. We then show how these statistical properties invalidate many of the common statistical approaches used to study financial data sets and examine some of the statistical problems encountered in each case.
This paper undertakes a fresh empirical investigation of key financial market variables and the theories that link them. We employ high frequency 5-minute data that include transaction price, trading volume, and the close bid and ask quote for the period May 5, 2004 through September 29, 2005. We document a number of regularities in the pattern of intraday return volatility, trading volume and bid-ask spreads. We are able to confirm the reverse J-shaped pattern of intraday bid-ask spreads with the exception of a major bump following the intraday auction at 13:05 CET. The aggregate trading volume exhibits L-shaped pattern for the German blue chip index, while German index volatility displays a somewhat reverse J-shaped pattern with two major bumps at 14:30 and 15:30 CET. Our empirical findings show that contemporaneous and lagged trading volume and bid-ask spreads have numerically small but statistically significant effect on return volatility. Our results also indicate asymmetry in the effects of volume on conditional volatility. However, inclusion of both measures as proxy for informal arrival in the conditional volatility equation does not explain the well known volatility persistence in intraday stock returns.
After examining both the interday and intraday return volatility of the Shanghai Composite Stock Index, it was found that the open-to-open return variance is consistently greater than the close-to-close variance. Examining the volatility of interday returns and variance ratio tests with five-minute intervals reveals an L-shaped pattern, or more precisely, two L-shaped patterns, starting with a small hump during both the morning and the afternoon sessions, with the morning session having a much higher interday volatility than the afternoon session. This L-shaped interday volatility is supported by the similarly shaped intraday volatility pattern. This result suggests that the high volatility of intraday returns for the market open is not entirely due to the trading mechanisms (call auction in the market opening) but also due to both the accumulated overnight information and the trading halt effect. The five-minute breaks after the auction and blind auction procedures are the two major driving forces which exaggerate the high intraday volatility observed at the market open. Copyright Springer Science+Business Media, LLC 2007
This article develops a theory in which concentrated-trading patterns arise endogenously as a result of the strategic behavior
of liquidity traders and informed traders. Our results provide a partial explanation for some of the recent empirical findings
concerning the patterns of volume and price variability in intraday transaction data.
Abstract Using a data set consisting of more than five years of 5-minute intraday stock index returns for major European stock indices and US macroeconomic surprises, conditional means and volatility behaviour in European markets were investigated. The findings suggest that the opening of the US stock market significantly raises the level of volatility in Europe, all markets responding in an identical fashion. Furthermore, US macroeconomic surprises exert an immediate and major impact on both the European stock markets’ intraday returns and volatilities. Thus, high frequency data appear to be critical for the identification of news impacting the markets.
Weekly and intradaily patterns in common stock prices are examined using transaction data. For large firms, negative Monday close-to-close returns accrue between the Friday close and the Monday open; for smaller firms they accrue primarily during the Monday trading day. For all firms, significant weekday differences in intraday returns accrue during the first 45 minutes after the market opens. On Monday mornings, prices drop, while on the other weekday mornings, they rise. Otherwise the pattern of intraday returns is similar on all weekdays. Most notable is an increase in prices on the last trade of the day.
Performance of candlestick analysis on intraday futures data / H. Fock, C. Klein, B. Zwergel. - In: The Journal of derivatives. 13. 2005. S. 28-40
Five-minute returns from FTSE-100 index futures contracts are used to obtain accurate estimates of daily index volatility from January 1986 to December 1998. These realized volatility measures are used to obtain inferences about the distributional and autocorrelation properties of FTSE-100 volatility. The distribution of volatility measured daily is similar to lognormal whilst the volatility time series has persistent positive autocorrelation that displays long-memory effects. The distribution of daily returns standardized using the measures of realized volatility is shown to be close to normal unlike the unconditional distribution.
Compares the trading efficiency of electronic and open outcry futures markets. Argues that the difference between the German DAX (floor) and FDAX (electronic) markets is due to asset type, not to information processing speed. Describes the German trading environment, comparing trading data from 1992 to 1994. Shows that the returns for DAX are positively skewed and for FDAX negatively skewed and more volatile. From regression and Granger causality tests establishes a feedback relationship between the two markets, in which the spot market is slower to digest information than the futures market. Points out that the dominant DAX stocks are also traded electronically, so the means of trade is not the cause of the difference.
The German 10-year Bund futures contract traded on the Eurex futures and options exchange in Frankfurt became the world's most actively traded derivative product by the end of 1999. In this article, we provide a detailed exploration of the interday and intraday return volatility in the Bund futures contract using a sample of five-min returns from 1997 to 1998. The evolution of interday volatility is described best by a MA(1)-fractionally integrated process that allows for the long-memory features. At the intraday level, we find that macroeconomic announcements from both Germany and the U.S. are an important source of volatility. Among the various German announcements, we identify the IFO industry survey of business climate, industrial production (preliminary), and Bundesbank policy meeting as being by far the most important. The three most significant U.S. announcements include the employment report, the National Association of Purchasing Managers (NAPM) survey, and employment costs. Overall, U.S. macroeconomic announcements have a far greater impact on the Bund futures market than their German counterparts. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:679–696, 2002
This article examines the intraday price discovery process among stock index, index futures, and index options in Germany using DAX index securities and intraday transactions data. The three index securities contribute to a common factor, but the spot index and index futures have substantially larger information shares than index options. Moreover, the returns of the three index securities exhibit feedback effects, with futures being dominant. Because the trading costs of the futures appear to be the lowest of the three and those of the options to be the highest, the results are consistent with the transaction cost hypothesis. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 619–643, 1999
The international transmission of intraday price volatility among the United States, United Kingdom, and Japanese stock index futures markets in the period 1988--1994 is investigated in this paper. The empirical results based on extreme-value estimators and vector autoregression indicate the rapid transmission of information between markets. The volatilities of the U.S. and U.K. futures markets appear to follow a meteor shower rather than a heat wave type of process. This means that these volatilities react to shocks from other markets, i.e., they cannot be described only by their past values. However, the heat wave hypothesis is not rejected for the Japanese market, meaning that the shocks to Japanese volatility are mostly country-specific. A multivariate GARCH model supports the U.K. and Japanese but not the U.S. results.
There is a significant increase in trading volume on quarterly futures expiration days in Germany. Delays in the opening for the majority of index stocks indicate that a large part of this extraordinary volume is indeed traded right at the opening of the market. an increase in trading activity is also observed over the 10-minute settlement period for index options. Volatility remains unchanged around the expiration of a futures contract. an increase is found for the 10-minute settlement period of DAX options. Return reversals as the measure for the economic costs of contract expirations are significantly higher when a futures contract expires at the open. When an option expires at the close no clear pattern for reversals can be found. Copyright Blackwell Publishers Ltd. 1996.
The Fourier flexible form and its derived expenditure system are introduced. Subject to smoothness conditions on the consumer's true indirect utility function, the consumer's true expenditure system must be of the Fourier form over the region of interest in an empirical investigation. Arbitrarily accurate finite parameter approximations of the consumer's true expenditure system are obtained by dropping all high-order terms of the Fourier expenditure system past an appropriate truncation point. The resulting finite parametersystem is tractable in empirical studies. The reader who is primarily interested in applications need only read the second and fifth sections. The remainder of the article is concerned with the verification of these claims and an investigation of some aspects of the bias in Translog specifications.
To determine whether an industry exhibits constant returns to scale, whether the production function is homothetic, or whether inputs are separable, a common approach is to specify a cost function, estimate its parameters using data such as prices and quantities of inputs, and then test the parametric restrictions corresponding to constant returns, a homothetic technology, or separability. Statistically, such inferences are valid if the true cost function is a member of the parametric class considered, otherwise the inference is biased. That is, the true rejection probability is not necessarily adequately approximated by the nominal size of the statistical test. The use of fixed parameter flexible functional forms such as the Translog, the generalized Leontief, or the Box-Cox will not alleviate this problem.The Fourier flexible form differs fundamentally from other flexible forms in that it has a variable number of parameters and a known bound, depending on the number of parameters, on the error, as measured by the Sobolev norm, of approximation to an arbitrary cost function. Thus it is possible to construct statistical tests for constant returns, a homothetic technology, or separability which are asymptotically size α by letting the number of parameters of the Fourier flexible form depend on sample size. That is, the true rejection probability converges to the nominal size of the test as sample size tends to infinity. The rate of convergence depends on the smoothness of the true cost function; the more times is differentiable the true cost function, the faster the convergence.The method is illustrated using the data on aggregate U.S. manufacturing of Berndt and Wood (1975, 1979) and Berndt and Khaled (1979).
This paper examines the effect of periodic stock market closure on transactions demand and volume of trade, and consequently bid and ask prices. We extend Merton (1971) to show that transactions demand at open and close is greater and less elastic than at other times of the trading day. In response, a market maker such as an NYSE specialist may effectively price discriminate by charging a higher price to transact at these periods of peak demand. Our predictions of periodic demand with high volume and concurrent wide spreads are consistent with empirical evidence, while the predictions of current information based models are not.
Thesis - University of Pennsylvania. Bibliography: leaves xiii-xvii. Includes index.
Intraday-Volatilität und Expiration-Day-Effekte bei DAX, IBIS-DAX und DAX- Future. - In: Finanzmarkt und Portfolio Management. 10. 1996. S. 436-477
This paper uses a nonparametric test based on the Arc-Sine Law (see e.g. Feller (1965)), which involves comparing the theoretical distribution implied by an intraday random walk with the empirical frequency distribution of the daily high/low times, in order to address the question of whether or not the abandonment of pit trading has been associated with greater market efficiency. If market inefficiencies result from flaws in the market microstructure of pit trading, they ought to have been eliminated by the introduction of screen trading. If, on the other hand, the inefficiencies are a reflection of investor psychology, they are likely to have survived, unaffected by the changeover. We focus here on four cases. Both the FTSE-100 and CAC-40 index futures contracts were originally traded by open outcry and have moved over to electronic trading in recent years, so that we are able to compare pricing behaviour before and after the changeover. The equivalent contracts in Germany and Korea, on the other hand, have been traded electronically ever since their inception. Our results overwhelmingly reject the random walk hypothesis both for open outcry and electronic trading datasets, suggesting there has been no increase in efficiency as a result of the introduction of screen trading. One possible explanation consistent with our results would be that the index futures market is characterised by intraday overreaction.
Improved estimators of security price volatility are formulated. These estimators employ data of the type commonly found in the financial pages of a newspaper, namely the high, low, opening and closing prices, and the transaction volume. The new estimators have much higher relative efficiency than the standard estimators.
We use a data set consisting of a complete history of all transactions and quotes to examine intraday patterns in trading volume, volatility and the quoted bid-ask spread in the market for FTSE-100 index futures. We document a number of regularities in the pattern of daily returns and volatility of the cash index. We also document intraday patterns in the basis, i.e. the contemporaneous difference between the futures price and the underlying cash index level. In general, we find returns vary over the day, reflecting in particular the influence of the US market openings in early afternoon London-time. We find that, while both volume and volatility exhibit a U-shaped pattern over the day, movements in the spread tend if anything to follow the opposite pattern. As far as consistency with microstructure models is concerned, our results are more supportive of the Brock and Kleidon model than the Admati and Pfleiderer model.
This paper examines the intraday behaviour of five-minute FTSE-100, Short Sterling and Long Gilt LIFFE futures returns volatility and volume. The intraday patterns identified exhibit a U-shape, significantly affected by UK and US macroeconomic news releases. Evidence from estimation of a GMM system for volatility and volume supports a significant positive and contemporaneous correlation between volatility and volume, although lagged volume is also significant in the volatility equation. Further, there is strong evidence of bi-directional causality on the basis of Granger-causality testing. These results are found to be robust to the adjustment of volatility and volume for macroeconomic news effects, and in the case of the Granger-causality tests to a variety of temporal horizons.
This paper examines the intraday information transmission process among the Deutscher Aktienindex (DAX), DAX futures and DAX options in Germany. Using the extreme value volatility approach developed in Booth et al. (1997, Management Science, 43, 1564-1576), the volatilities of the three markets are found to spill over to one another. These results support the notion that the three index assets are informationally linked, and the three markets should be considered a complete system for intraday information processing.
This paper provides a detailed characterization of the volatility in the deutsche mark-dollar foreign exchange market using an annual sample of five-minute returns. The approach captures the intraday activity patterns, the macroeconomic announcements, and the volatility persistence (ARCH) known from daily returns. The different features are separately quantified and shown to account for a substantial fraction of return variability, both at the intraday and daily level. The implications of the results for the interpretation of the fundamental "driving forces" behind the volatility process is also discussed. Copyright The American Finance Association 1998.
The authors examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets. They find these announcements are responsible for most of the observed time-of-day and day-of-the-week volatility patterns in these markets. While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours. Nonetheless, these subsequent price adjustments are basically independent of the first minute's return. The authors identify those announcements with the greatest impact on these markets. Copyright 1993 by American Finance Association.
Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing “cash flow” and “discount rate” effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.
This paper examines intra-day variations in the bid-ask spread, volatility and volume for stocks traded on the London Stock Exchange. The data set used consists of quote and transactions data for a large sample of 835 stocks traded during the first quarter of 1991. The focus of the study is twofold; first, is to document a number of stylized facts regarding the intra-day behaviour of spread, trading volume, volatility etc. Second, the paper tests some predictions of two theoretical models of intra-day behaviour: the Admati and Pfleiderer and the Brock and Kleidon models. In addition, the paper also studies qualitatively the intra-day behaviour of several variables of interest including volume per transaction, transactions per fifteen-minute interval and spreads/trading volume for stocks of differing liquidity. The results suggest that the bid-ask spread is wide at the open, constant through the day and rises slightly at the close. Trading volume, in contrast is not highest at the open and the close. Volatility, based on the mid-point of the inside spread, shows a U-shaped pattern. Volume per transaction, in contrast, is fairly constant throughout the day. Further, the intra-day trading volume pattern differs for liquid and illiquid stocks. The results provide mixed support for current theoretical models of intra-day behaviour of spread, volume and volatility on the London Stock Exchange Copyright Blackwell Publishers Ltd 1997.
A theory of financial markets based on a two-parameter portfolio model is shown to imply stochastic dependence between transaction volume and the change in the logarithm of security price from one transaction to the next. The change in the logarithm of price can therefore be viewed as following a mixture of distributions, with transaction volume as the mixing variable. For common stocks these distributions (of which the distribution of Δ log p is a mixture) appear to have a pronounced excess of frequency near the mean and a deficiency of outliers, relative to the normal. These findings are consistent with the hypothesis that stock price changes over fixed intervals of time follow mixtures of finite-variance distributions.
This paper concerns the relationship between the variability of the daily price change and the daily volume of trading on the speculative markets. Our work extends the theory of speculative markets in two ways. First, we derive from economic theory the joint probability distribution of the price change and the trading volume over any interval of time within the trading day. And second, we determine how this joint distribution changes as more traders enter (or exit from) the market. The model's parameters are estimated by FIML using daily data from the 90-day T-bills futures market. The results of the estimation can reconcile a conflict between the price variability-volume elationship for this market and the relationship obtained by previous investigators for other speculative markets.
This paper studies estimators that make sample analogues of population orthogonality conditions close to zero. Strong consistency and asymptotic normality of such estimators is established under the assumption that the observable variables are stationary and ergodic. Since many linear and nonlinear econometric estimators reside within the class of estimators studied in this paper, a convenient summary of the large sample properties of these estimators, including some whose large sample properties have not heretofore been discussed, is provided.
S. Bochner’s concept of a subordinate stochastic process is proposed as a model for speculative price series. A general class of finite-variance distributions for price changes is described, and a member of this class, the lognormal-normal, is tested against previously proposed distributions for speculative price differences. It is shown with both discrete Bayes’ tests and Kolmogorov-Smirnov tests that finite-variance distributions subordinate to the normal fit cotton futures price data better than members of the stable family.
We examine the lead-lag relation between intraday spot and futures prices for stock index where the component stocks are floor traded while the futures contract is screen traded. We find that futures prices lead spot prices by nearly 20 minutes. This is much longer than in markets where both the index and index futures are floor traded. We show that this lead-lag relation is unlikely to be an artifact of differences in liquidity between spot and future markets. These results are consistent with the hypothesis that screen trading accelerates the price discovery process.
Using transactions data, the behavior of returns and characteristics of trades at the micro level is examined. A minute‐by‐minute market return series is formed and tested for normality and autocorrelation. Evidence of differences in return distributions is found among overnight trades, trades during the first 30 minutes following the market opening, trades at the close, and trades during the remainder of the day. The latter distribution is found to be normal. Unusually high returns and standard deviations of returns are found at the beginning and the end of the trading day. When the beginning‐and end‐of‐the‐day effects are omitted, autocorrelation in the market return series is reduced substantially. A number of patterns in trading are reported.
In an effort to better understand the dynamic market price adjustment process, this paper develops a model which describes the impact of new information on a financial market. The primary emphasis is on the price change‐volume relationship in the presence of a margin requirement. We find that the margin requirement significantly affects the relation of price change to volume. Furthermore, this relationship is shown to be affected by the number of investors in the market, the degree of information dissemination, differences in interpretation of information and the implicit cost of the margin requirement.
This paper addresses the important relationship between stock index and stock index futures markets in an international context. By simply examining the spot-futures relationship within a single country as most of the extant literature does and thus ignoring possible market interdependencies between countries, the dynamics of price adjustments may be misspecified and thus findings misleading. The main contribution of the paper is to improve our understanding of the pricing relationship between spot and futures markets in the light of international market interdependencies. Using a multivariate VAR-EGARCH methodology, the paper investigates stock index and stock index futures market interdependence, that is lead-lag relationships and volatility interactions between the stock and futures markets of three main European countries, namely France, Germany and the UK. In addition, the paper explicitly accounts for potential asymmetries that may exist in the volatility transmission mechanism between these markets. The main conclusions of the paper imply that investors need to account for market interactions across countries to fully and correctly exploit the potential for hedging and diversification. Copyright Blackwell Publishers Ltd, 2003.
The paper examines intra-day share price volatility over the year 2000 for five market centres: the New York Stock Exchange, Nasdaq, the London Stock Exchange, Euronext Paris and Deutsche Borse. In each of these markets, we observe a U-shaped intraday volatility pattern, a particularly sharp spike for the opening half hour, and a general level of intra-day volatility that is accentuated vis-a-vis volatility over longer differencing intervals, e.g. daily and weekly periods. We suggest that the volatility accentuation is attributable to spreads, market impact, price discovery and momentum trading--all of which are either trading costs or exist because of trading costs. Because the magnitude of trading costs depends in part on market design, we also suggest that a link exists between intra-day volatility and market structure, and that market quality/efficiency on both sides of the Atlantic could be improved.
Copyright 2002 by Blackwell Publishers Ltd.
The impact of scheduled news announcements on T-bond and Bund futures trading
- G Hess
G, Hess D (2000) The impact of scheduled news announcements on T-bond and Bund futures trading. In: Vosgerau HJ (ed) Institutional arrangements for global economic integration.