Robert I. Webb

Asymmetric and negative return-volatility relationship: the case of the VKOSPI

ABSTRACT KOSPI 200 index options are the most actively traded exchange-listed derivative contracts in the world. And, unlike most other active options markets, trading is dominated by individual investors. This study examines the short-term relationship between stock market returns and implied volatility in the Korean financial market using high frequency data on the recently introduced volatility index (VKOSPI) implied by KOSPI 200 options. We find a strong asymmetric and negative return-volatility relationship at both the daily and intraday levels, which cannot be explained by either leverage or volatility feedback hypotheses on the asymmetric volatility phenomenon. Moreover, we also find that the asymmetric relationship is more pronounced for extremely negative stock market returns. We conjecture that behavioral factors better explain the observed asymmetric return-volatility relationship.

Arbitrage, cointegration, and the joint dynamics of prices across discrete commodity futures auctions

Underlying the search for arbitrage opportunities across commodity futures markets that differ in market structure is the idea that the futures prices for similar commodities that are traded on different exchanges adjusted for differences in currency, delivery time (if any), location, and market structure are equal. This article examines price linkages in competing discrete commodity futures auction markets. We find no evidence of cointegration of futures prices of similar commodities traded on two contemporaneous discrete auction futures exchanges in Asia. We also find no evidence of arbitrage activities across these two Asian exchanges, though this does not preclude arbitrage activities with North American continuous auction markets. This lack of cointegration may be due to nonstationarities in the trading cost component.

Futures trading in less 'noisy' markets

Abstract The Itayose-hoh auction system used on many Japanese commodity futures markets produces futures prices which are less ‘noisy’ than those generated on the open outcry auction system used on most U.S. futures markets. This affords a test of some propositions Black (1986) advances concerning the influence of ‘noise’ on the behavior of speculative prices. Data on Tokyo Grain Exchange azuki or red bean futures prices are used to examine Blacks hypotheses.

High-Frequency Trading: Implications for Markets, Regulators, and Efficiency

The sharp rise in high-frequency trading in recent years has caused average trade horizons to fall as traders attempt to exploit fleeting inconsistencies in prices with the aid of powerful computers and equally powerful algorithms. This practice is now poised to dominate the regular volume of order flow. More seriously, it brings into perspective issues such as induced excess volatility, whether the playing field is level for all market participants, and even the informational efficiency of security markets. In this article, the authors review what high-frequency trading is, and explore the links between such trading and market efficiency and volatility. Finally, they assess the potential for further trading practices to emerge, the likes of which most observers would not have imagined as feasible even 10 years ago.

Persistent Growth Rate Differentials among States in a National Economy with Factor Mobility

This chapter discusses the existence of apparent persistent income differentials among states in a national economy with factor mobility. A simple neoclassical model is advanced with a single market good and two factors of production—one fixed and one mobile—which must decide whether to engage in market or household production. The mobile factor is able to largely or entirely escape state, but not federal, taxes while the fixed factor is unable to escape either state or federal taxes. Although government services received are included in income by both factors of production, state fiscal policies are explicitly introduced into the model as it is recognized that such policies may alter the incentives to engage in market and household production. Consequently, if household and market goods are imperfect substitutes, market incomes may diverge across states, although full incomes need not, as individual state fiscal policies alter the relative incentives to engage in market and household production.

The Revenue Effects of the Kennedy and Reagan Tax Cuts: Some Time Series Estimates

Univariate time series models are estimated for sample periods ending with the enactment of major tax reductions in 1964 and 1981. These models are used to forecast government revenue for the period following the tax cut, and the pattern of forecast errors is examined. Unforecast revenue is negative and large relative to its standard error following the 1981 tax cuts but is close to zero following the 1964 cuts. This disparity occurs because national output behaved differently in the two cases, suggesting that short-run movements in output are dominated by factors other than tax rate changes.

Do Derivative Markets Contain Useful Information for Signaling 'Hot Money' Flows?

This study examines whether information from derivative markets is useful for signaling “hot money�? and other large capital flows in an economy where the monetary authority pursues a policy of exchange rate stability. Specifically, this study examines the information content of various Hong Kong traded derivative securities for signaling changes in the aggregate balance of the Hong Kong banking system during a period of intense IPO activity and speculation on the revaluation of the renminbi. The impact of the introduction of the Hong Kong Monetary Authority’s (HKMA) Convertibility Undertakings on the dynamic relationships among capital flows, stock market volatility and stock market turnover is also examined. Finally, the implications for monetary policymakers in potentially using information from derivative markets are assessed. The results show that derivative markets contain useful information for signaling “hot money�? flows. Granger causality tests from a VAR model show that Hong Kong dollar forward and RMB non-deliverable forward (NDF) prices predict future variation in the aggregate balance. Moreover, changes in aggregate balance has a significant impact on Hong Kong’s interbank rates. The findings also suggest that the introduction of the May 18, 2005 Convertibility Undertakings may have increased the credibility of the Linked Exchange Rate System by discouraging the use of the Hong Kong dollar and Hong Kong dollar denominated assets as speculative vehicles on RMB denominated assets.

The Intraday Properties of the VIX and the VXO

This paper investigates daily and intraday properties of the VIX and its predecessor the VXO. Sampling data at a one-minute frequency, we document that both the VIX and VXO display a negative drift intraday. While this finding is expected in the VXO, given its constant 30-day maturity at a daily frequency, it is surprising to observe the same pattern in the VIX, which maintains the constant maturity at a one-minute frequency. In addition, we document that the VIX has a distinct intraweek pattern, declining during the week and surging over the weekend. We further observe that there is intraday and intraweek variation in the relation between the VIX and the S&P500 (the leverage/feedback effect) which appears to be most negative during the middle of the trading day. Similarly, there is a U-shape pattern in this relation during the week, with the leverage effect being most negative in the middle of the week.

The Geographic Origin of Order Flow and Price Discovery

This study exploits a unique dataset to determine the relative contribution to price discovery of order flow originating from geographically dispersed ASX servers. It is found that the transactions of traders on the Sydney, Chicago and London servers have a significant impact on price volatility. Trades initiated on the Sydney and Chicago servers incur lower pre-trade transaction costs, pay a lower premium to liquidity providers, and have a higher price impact. Traders using the Sydney and Chicago servers contribute significantly to price discovery on the local Australian market. Our results imply that foreign investors can differ in their private information endowments, and collectively contribute to the market efficiency of local markets even when their individual impact is small. Our findings extend the previous literature on home equity bias and may explain the conflicting evidence over whether foreign or local investors are better informed.

Price Shocks and the Performance of Managed Futures Funds

Can specialized trading firms capture the potentially substantial returns associated with large sudden price moves? This study attempts to answer that question by examining the monthly performance of managed futures funds during months in which large daily price shocks in the foreign exchange market occur. Specifically, it attempts to assess whether Commodity Trading Advisors (CTAs) that specialize in speculating on changes in foreign exchange rates are able to capture the price change precipitated by the shock in the month of the price shock