Phil Holmes

Futures trading, information and spot price volatility: evidence for the FTSE-100 stock index futures contract using GARCH

Abstract This paper examines the impact of trading in the FTSE-100 Stock Index Futures on the volatility of the underlying spot market. To examine the relationship between information and volatility (as subject neglected in previous studies) the GARCH family of techniques is used. The results suggest that futures trading has led to increased volatility, but that the nature of volatility has not changed post-futures. The finding of price changes being integrated pre-futures, but being stationary post-futures, implies that the introduction of futures has improved the speed and quality of information flowing to the spot market.

The effects of stock index futures trading on stock index volatility: An analysis of the asymmetric response of volatility to news

The asymmetric response of volatility to news has been attributed to leverage effects, but the authors show that noise trading is an important contributor to asymmetric effects. Contrary to the traditional view, introducing futures trading has no detrimental impact on the underlying markets. Futures trading improves market dynamics in processing news by transferring noise trading from spot to futures markets.

Market Efficiency, Thin Trading and Non-linear Behaviour: Evidence from an Emerging Market

Emerging markets efficiency has been widely investigated, with mixed results. However such evidence is only reliable if the methodology adopted accounts for the institutional features of the market. Unlike previous studies this paper corrects for thin trading and incorporates possible non‐linear behaviour and regulatory changes. Using Istanbul Stock Exchange data we show that in its early years the exchange was characterised by non‐linear behaviour and inefficient pricing. However, regulatory changes encouraged participation, improved information quality and led to prices impounding information more rapidly, suggesting markets become efficient with high trading volume, reliable information and an appropriate institutional framework.

An analysis of new firm survival using a hazard function

A unique data set is used to provide a detailed examination of the survival of newly established manufacturing firms in north-east England. Using data on 781 firms established between 1973 and 2001, log-logistic hazard models are estimated separately for (i) micro-enterprises and (ii) small and medium establishments (SMEs). Both micro-enterprises and SMEs show clear evidence of positive duration dependence, followed by negative duration dependence. We find the two firm types are differentially affected by firm-specific and macro-economic variables. Increases in initial plant size impact negatively on micro-enterprise survival and positively on SME survival.

Technical analysis, trading volume and market efficiency: evidence from an emerging market

Although there is a widespread belief that stock markets are weak-form efficient, technical analysis is a pervasive activity. The extent is examined to which this apparent paradox can be explained by conditioning the past sequence of prices on the past sequence of volume. A unique data set from an emerging market reveals that, for a number of companies in the sample, returns appear to conform to the weak-form version of the efficient markets hypothesis. However, when returns are conditioned on past levels of volume, current returns on over half of these companies exhibit predictability. This is particularly true from companies with low trading volumes.

Herding in a Concentrated Market: A Question of Intent

While considerable evidence exists that institutions herd, the issue of why herding takes place remains unresolved. Using monthly holdings data for Portugal, we find clear evidence of herding and investigate whether such behaviour is intentional or spurious. By analysing herding under different market conditions, we conclude it is intentional. Month‐of‐the‐quarter analysis suggests reputational reasons drive behaviour. Results are consistent with herding interacting with window dressing to determine funds, buy and sell decisions. The findings are important in understanding market dynamics and fund managers’ behaviour and are of great significance to investors in managed funds.

The hedging effectiveness of stock index futures: evidence for the FTSE-100 and FTSE-mid250 indexes traded in the UK

This study provides the first investigation of the hedging effectiveness of the FTSEMid250 stock index futures contract. In contrast to previous studies, the portfolios to be hedged are actual diversified portfolios in the form of investment trust companies (ITCs). Furthermore, in addition to using the well established hedging strategies, consideration is also given to hedge ratios estimated on the basis of the Least Trimmed Squares approach. Despite relatively thin trading, the FTSE-Mid250 contract is shown to be an important additional hedging instrument. Surprisingly, the new contract is more effective for hedging ITCs than is the established FTSE-100 contract. The study also demonstrates that previous studies overstate the hedging effectiveness of UK stock index futures, in that they assume the portfolio to be hedged is one which underlies a broad market index.

Ex ante hedge ratios and the hedging effectiveness of the FTSE-100 stock index futures contract

This paper examines the hedging effectiveness of the FTSE-100 stock index futures contract over the period 1984–92. Previous studies have examined this issue using ex post hedge ratios, resulting in an overestimation of hedging performance. This study utilizes ex ante hedge ratios which are determined on the basis of historical information. It is shown that while hedge ratios vary through time, nonetheless it is possible to use this futures contract to achieve very substantial risk reduction as compared to an unhedged position. Hedge ratios estimated over longer periods are shown to provide greater risk reduction when applied in subsequent periods.

Inter-market spread trading: evidence from UK index futures markets

This paper employs the theoretical no-arbitrage conditions to investigate whether the inter-market spread comprising of positions in the FTSE 100 contract and FTSE Mid 250 contract is priced according to fair value. The results show that while transaction cost limits are violated on a number of occasions, the overall profitability of the strategy is seriously impaired by the difficulty, which traders face, in liquidating their positions before relative market movements between the two legs of the spread occur.

Ex Ante Hedging Effectiveness of UK Stock Index Futures Contracts: Evidence for the FTSE 100 and FTSE Mid 250 Contracts

Ex ante hedging effectiveness of the FTSE 100 and FTSE Mid 250 index futures contracts is examined for a range of portfolios, consisting of stock market indexes and professionally managed portfolios (investment trust companies). Previous studies which focused on ex post hedging performance using spot portfolios that mirror market indexes are shown to overstate the risk reduction potential of index futures. Although ex ante hedge ratios are found to be characterised by intertemporal instability, ex ante hedging performance of direct hedges and cross hedges approaches that of the ex post benchmark when hedge ratios are estimated using a sufficient window size.