This paper examines the impact of algorithmic trading on the resiliency of bid-ask spreads and market depth. We use a natural experiment provided by the Australian Securities Exchange (ASX) for futures markets in 2012—the introduction of collocated facilities for FCM's. Previous research demonstrates that the change on the ASX in 2012 increased algorithmic trading and improved liquidity. We extend

In this paper we show that a Kelly trader is indifferent to trade a derivative if and only if the no-arbitrage price is uniquely given by the minimal martingale measure price, thus providing a natural selection mechanism for option pricing in incomplete markets. We also show that the unique Kelly indifference price results in market equilibrium in the sense that no Kelly trader can improve the magnitude

We propose an equilibrium valuation model for bitcoin options by extending Cao. Bitcoin is interpreted as a foreign currency in a small open economy where money supply and aggregate dividend are exogenous. The equilibrium bitcoin prices increase with diffusive and jump risks of these two exogenous factors. Analytical option pricing formulas are obtained with Merton's model as a special case. Static

This study uses bibliometrics to present a retrospective on the Journal of Futures Markets (JFM) on its 40th anniversary. The Journal's annual number of publications and citations grew substantially, with US-affiliated authors being the dominant contributors. Authorship analysis reveals an increase in collaboration and diversity among JFM authors. Bibliographic coupling analysis reveals that the Journal's

Gold exchange-traded funds (ETFs) have amassed massive inflows from institutional investors globally. We examine intraday price discovery and volatility connectedness among three gold instruments—spot, futures, and ETF—across mature and emerging gold markets in domestic and international settings from 2010 to 2018. Using the network approach, we find that gold futures are a global leader in price discovery

We develop a heterogeneous autoregressive model of downside volatility (HAR-DV) model with structural changes (HAR-DV-SC) model to investigate the effects of structural changes on predicting downside volatility. Then we employ HAR-DV and HAR-DV-SC models to forecast downside volatilities in S&P 500 index, crude oil, gold, copper, and soybean futures markets. The in-sample analysis shows that structural

In this study, we compare the pricing and hedging performance of options-pricing models using two parameter-estimation methods to employ cross-sectional options data with multiple maturities. In the Portfolio of Volatility Smiles method, each set of parameters that describe the individual volatility smile for each maturity is estimated separately. In the Volatility Surface method, a single-parameter

We compare factor models with respect to their ability to explain commodity futures return comovements. A simple one-factor model based on the first principal component extracted from a panel of commodity returns outperforms a macroeconomic model, and explains most of the realized comovements. We find that intersectoral correlations display more time variations than intrasectoral correlations. Dissecting

This paper constructs a model of an Emission Trading Scheme (ETS) market using bid-ask spreads. We show that when such a market is dominated by a small number of traders with substantial market power, they tend to maximize their profits by widening bid-ask spreads, thereby reducing market liquidity. We argue that adding more market participants, including derivatives traders, can alleviate this illiquidity

This paper investigates the information content of the futures option markets trading activities in determining commodity futures returns. Our findings suggest that position changes in the commodity futures option markets provide incremental predictive power for commodity futures returns in addition to the effects of commodity futures markets position changes. Particularly, for both commercial traders

Option Shock was a notable 2010 manipulation in Korean stock and derivatives markets. Motivated by Option Shock, we examine the effectiveness of the conditional random-end (RE) trading mechanism during the opening or closing call auction on the Korea Exchange. We find the conditional RE trading mechanism promotes price stabilization, but with some reservations, and improves price discovery and efficiency

This study examines the effect of investor sentiment on misreaction and explores the time-series relationship between risk-neutral skewness (RNS) and subsequent stock market returns contingent on sentiment-induced overreaction. Using the adjusted put-call implied volatility spread as a misreaction proxy and Bakshi et al.'s method to measure RNS, we find that pessimism leads to overreaction. This overreaction

We provide evidence that the stock market response to macroeconomic news weakens in times of high investor sentiment. The reaction to macroeconomic information is 50% weaker in times of elevated bullish investor sentiment, relative to periods of low sentiment. This dampening effect holds for both good and bad macroeconomic news. Investor sentiment seems to hinder the incorporation of public information

We conduct a comprehensive study on the specifications of VXX option pricing models under Lévy processes during the period from 2010 to 2017 based on in-sample and out-of-sample performance tests. Our empirical results imply that a jump component plays an important role in VXX option pricing. In particular, we find that infinite-activity jump models are superior to finite-activity jump models. More

This paper investigates the volatility spillovers across precious and industrial metal markets over the period 1993–2019 based on the DY and ​BK methods. Results are summarized as follows: (1) while volatility spillovers across industrial metals are higher than across precious metals, the opposite occurs during crisis periods where precious metals cause net volatility spillovers to industrial metals;

The importance of jump clustering is widely recognized in the financial market. We use the Hawkes process to capture jump propagation risks and study their role in modeling the Volatility Index (VIX) term structure. Applying the joint estimation approach to the S&P 500 index and the VIX term structure, we find that incorporating jump propagation risks is important to reconcile the dynamics of joint

This paper investigates whether commodity‐related equities (commodity stocks) should be included in investors' portfolios. In light of the recent financialization of commodity futures markets, it examines the diversification benefits derived from investing in commodity stocks and compares them with those derived from commodity futures. The empirical evidence indicates that over the prefinancialization

Prior research in hedge fund and mutual fund management finds a positive relation between portfolio distinctiveness and subsequent performance, suggesting that strategy differentiation is associated with superior skill. We find that commodity trading advisors (CTAs) with returns that correlate more strongly with those of peers feature higher performance and are more highly exposed to a time series

Motivated by the growing interest of investors in commodities and by advances in risk measurement, we present a full‐scale analysis of expected shortfall (ES) in commodity futures markets. Besides illustrating the dynamics of historic ES, we evaluate whether popular estimators are suitable for forecasting future ES. By implementing a new backtest, we find that the performance of estimators hinges on

In this study, we examine the efficiency and unbiasedness of Atlantic salmon futures prices. Market participants use the Fish Pool futures market to hedge the increasingly volatile salmon spot price. We further examine the futures market's predictive accuracy, comparing it to a variety of proprietary prediction models. Our results show that futures prices are efficient and unbiased in the long‐run

This paper adopts the fractional cointegrated vector autoregressive (FCVAR) model to examine high‐frequency price discovery of bitcoin spot and futures prices from December 18, 2017 to July 31, 2020. We find that bitcoin spot and futures prices exhibit long memory properties and they are fractionally cointegrated. The result shows that the bitcoin futures market dominates the price discovery process

In this paper, we show that forward premiums are significant predictors of innovations in currency spot rates, and currency forward rates lead to price discovery during normal trading periods. Conversely, currency spot rates lead to price discovery during volatile periods. This finding is linked to investors' overreaction to information, which in turn induces jumps in the currency spot rate; positive

The pricing of options and other derivatives which are subject to the default risk of the writer usually requires the calibration of a sophisticated model and substantial effort in determining the input parameters. We propose a very simple method to incorporate correlated credit risk into the pricing of vulnerable derivatives. The approach is based upon some approximations of more complex models and

Options can be dynamically replicated using model‐free Greeks extracted from the volatility smile. However, smile‐implied delta and delta–gamma hedging do not achieve minimum variance in the presence of price–volatility correlation, and these strategies have shown poor performance relative to the Black–Scholes (BS) benchmark. We propose a way to extend smile‐implied option replication with volatility

This paper examines the price impact of off‐market block trades in futures markets. Consistent with previous literature based on stock markets, a statistically significant price reaction is documented around the time that the trades are executed. This paper extends previous work by documenting a further statistically significant price reaction at the time that block trades are later reported. Contrary

We correct a mistake in Journal of Futures Markets 40(1):3–22. None of our results or conclusions is significantly affected. There is a factor 1/2 missing in the penultimate term of Equation (4) which should read ∂ C ∂ t + r S ∂ C ∂ S + 1 2 V S 2 ∂ 2 C ∂ S 2 + ( λ + μ V ) ∂ C ∂ V + ρ ξ V 1 ∕ 2 + α S ∂ 2 C ∂ S ∂ V + 1 2 ξ 2 V 2 α ∂ 2 C ∂ V 2 − r C = 0 . This mistake propagates throughout the paper.

We investigate the role of realized volatility in pricing VIX options by using the generalized affine realized volatility (GARV) model, and the Realized generalized autoregressive conditionally heteroscedastic (GARCH) model. We develop a closed‐form pricing formula for the (affine) GARV model. For the (nonaffine) log‐linear Realized GARCH model, we introduce a novel approximation approach to derive

This paper examines how intermediary capital risk (ICR) is priced in currency carry trades. In both in‐sample and out‐of‐sample settings, ICR holds strong explanatory power for time‐series currency returns. ICR is also a key driver of currency returns with a positive risk price in the cross section, suggesting that financial intermediaries are marginal investors in currency markets. We find an asymmetric

This paper explores the degree and structure of the dependence of commodity futures volatility on intermediary capital risk (ICR) and investigates the economic source of this association. The overall effect of ICR is negative and more significant for the post‐2008 period, although positive and negative ICR play asymmetric roles. Furthermore, we identify a heterogeneous structure of dependence across

Using autoregressive distributed lag modeling and structural break testing, we explore the drivers of the oil price spread between West Texas Intermediate and Brent in a data set from 1995 to 2019. We find a major structural break in December 2010 and minor breaks in 2005 and 2012. Important spread determinants are the convenience yield, as a proxy for crude oil inventories, the trading activity in

This paper discusses the computation of hedging strategies under affine Gaussian GARCH dynamics. The risk‐minimization hedging strategy is derived in closed‐form and related to minimum variance delta hedging. Several numerical experiments are conducted to investigate the accuracy and properties of the proposed hedging formula, as well as the convergence to its continuous‐time counterpart based on the

Uncertainty in banking regulation may impose widespread economic costs by increasing financial constraints on credit availability. Four years of Dodd‐Frank uncertainty over undecided risk weightings increased regulatory uncertainty for smaller banks, restricting “vanilla” interest rate hedging activities. This paper uses newly reported mortgage banking data as an identification strategy and finds that