Leo H. Chan

Cash Settlement and Price Discovery in Futures Markets

Prior to 1986, any opening position on feeder cattle futures contract must be settled with physical delivery after the last trading day. Due to dwindling commercial interests, Chicago Mercantile Exchange (CME) subsequently replaced the system with the cash settlement method. In December 1996 the CME abandoned the live hog futures contract and replaced it with the lean hog futures contract. While the former contract requires physical delivery, the later is settled in cash. It was argued that cash settlement would help improve the performance of these contracts. One of the main functions of the futures markets is the price discovery function. In this paper, we examine how cash settlement affects the ability of the futures market to predict future spot prices. Adopting the Geweke feedback measure, we find that the feeder cattle futures contract improves its price discovery function after the cash settlement was adopted in August 1986. Moreover, spot and futures markets become more integrated thereafter. We also consider the case in which the cash settled lean hog futures contract replaced the physical delivery settled live hog futures contract in December 1996. Herein the conclusion is drastically different. After cash settlement was adopted, the futures market is less effective in price discovery. Further, spot and futures markets are more segmented. We suspect other contract uncertainties, including the change in weighing scheme, gives rise to the undesirable results.

How Does the Asian Crisis Affect the Interdependencies Between Major Financial Markets in Asia and the US

Empirical studies support evidence of major financial markets affecting minor markets. During the Asian Crisis, however, major markets, such as the US and Japan, reacted to the problems in smaller markets such as Hong Kong and Singapore. In this paper we apply a VAR model to capture the changes in the dynamic relationship among stock markets in Hong Kong, Singapore, Japan and the US. A multivariate stochastic volatility model (SVM) is also utilized to study the correlations in volatility among these markets to determine the impacts of the Crisis. We find strong lead-effect of Hong Kong market returns over the US market returns during the Crisis. Our results also show strong overacting behavior among investors across these markets during the Crisis. We also find that the Crisis period was marked by higher volatilities and stronger spillover effects across these markets.

A NOTE ON THE CORRELATION RELATIONSHIP AMONG SINGAPORE, HONG KONG AND THE US CAPITAL MARKETS SINCE THE HONG KONG HANDOVER: IMPLICATION FOR INTERNATIONAL PORTFOLIO MANAGEMENT

In this note, I document the change in correlation between Hong Kong, Singapore and the US financial market indexes using Geweke Measures after the handover of Hong Kong to China. The results show that these relationships have changed significantly. While the feedback relationship between Hong Kong, Singapore and the US markets increase after the handover of Hong Kong, the increases in feedback relationship between Singapore and the US markets is relatively higher compared to the change between Hong Kong and the US markets.

The Information Value of Excessive Speculative Trades on Price Volatility in Oil Futures Markets

Abstract In this chapter, we apply the new measure of speculative activities (hereafter, named the speculative ratio) in Chan, Nguyen, and Chan (2013) to study the relationship between those activities and volatility in the oil futures market. We document that the speculative ratio (trading volume divided by open interest) can isolate speculative elements from total trading activities. Using the oil futures data and dividing the data into two subperiods surrounding Hurricane Katrina, we find an increased speculative trades in the post-Hurricane Katrina period. Our results show that speculative activities create a more volatile oil futures market and they lower the information flow between volatility and speculative activities in the post-Hurricane Katrina period.

Is Singapore Displacing Hong Kong? Evidence from the Stock Markets

Before the return of Hong Kong to China there has been speculations that the change will reduce the role of Hong Kong as the financial center in Southeast Asia. It is also suggest that Singapore will take over such role. In this paper we study the change in information flows between the stock markets in Hong Kong, Singapore and the US before and after the Hong Kong Turnover. If Singapore were displacing Hong Kong, we would expect a stronger relationship between the financial markets in Singapore and the US, and a relatively weaker relationship between the markets in Hong Kong and the US. Our results suggest that while the information flows between Hong Kong and the US, and between Singapore and the US increase after the Hong Kong Turnover, the increases in information flow between Singapore and the US is relatively higher compared to the change between Hong Kong and the US markets. Therefore, there is evidence that Singapore is gaining ground over Hong Kong as the financial center in Southeast Asia.