Existing spot-forward parities assume either a predictable cost of carry or a deterministic correlation between returns on the underlying asset price and the best-predicted convenience discount ...factor. We put forward a new spot-forward parity under any stochastic cost of carry. The forward price equals the spot price times a factor represented by the conditional expectation of the cost of carry accruing over the contract lifetime and computed using the martingale measure associated with the cumulative gain process that results from asset holding. We extend this result and derive a general pricing formula for contingent claims written on the forward price. These results apply to any asset that shows convenience revenue, e.g. a stock share, a coupon bond, foreign currency, and a commodity.
•A new spot-forward parity under any stochastic cost of carry.•The natural numéraire for a commodity is the cumulative gain that results from asset holding.•The natural probability for a commodity is the gain martingale measure.•A new and general pricing formula for commodity derivatives.
How do changes in expected inflation affect gold prices? Using unexpected changes in the Consumer Price Index (CPI) this paper shows that surprises in the CPI do not affect gold spot prices. The ...results indicate that investors anticipating changes in inflation expectations should design speculation strategies in the bond markets rather than the gold markets. Additionally, investors cannot determine market inflation expectations by examining the price of gold.
We examine whether index futures and options markets disagree with regard to their underlying spot prices and the mechanism whereby futures and options prices adjust to eliminate the price ...disagreements by comparing the actual and option-implied futures prices. The analysis of the microstructure dataset indicates that the price disagreement rates between the two markets are relatively low and both futures and options prices are adjusted in the case of disagreements.
•Price disagreement rates between the index futures and options markets are relatively low.•Both futures and options prices are adjusted to eliminate disagreements.•The options market is more likely to follow the futures market.
According to conventional storage theory, the difference between spot and futures prices (known as the ‘basis’) can be explained by the total cost of storing a commodity for a specific period of ...time. The theory predicts a positive relationship between inventory levels and the basis, and a negative correlation between inventories and marginal convenience yield. We investigate whether there is a defined and quantifiable relationship between inventory levels and market structure – defined as the basis or the corresponding degree of contango/backwardation – and what the exact nature of that relationship might be. The major drivers of inventories – the cost of carry, convenience yield and spread options value – are estimated for eight major international storage hubs using daily data from December 21, 2015, to January 25, 2019.
The analysis indicates that basic predictions of inventory theory are valid for daily and weekly frequencies but become less reliable for lower frequency data. We propose an alternative: a spread option-based formulation that adds a locational dimension to the theory and is based on the prices of crude oil at different locations, factoring in costs of storage and transportation, and the time required to transport oil between them. This methodology offers a viable alternative to the traditional cost of carry approach; it can estimate implied convenience yields and the shadow price of inventories. The data and methodology proposed in this study can give policy makers a better understanding of implied convenience yields, shadow storage prices, and market direction. It can also facilitate the construction of timely and efficient policies in the domains of energy security, market stability, and the management of public crude oil inventories. A better understanding of the relationship between inventories and the term structure of oil prices can assist market participants in trading, hedging and inventory management.
•Relationships between inventories and oil market structure are explored.•The cost of carry, convenience yield and spread options values are estimated.•Predictions of inventory theory are valid for weekly and daily frequencies.•These relationships can vary significantly across the different time frames.•The spread options approach offers a viable alternative to the traditional methods.
This study examines disagreements between actual and options-implied futures prices and the corresponding adjustments in a sophisticated setting. We identify the market that triggers each type of ...price disagreement and find that the market in which the disagreement is initiated adjusts more to eliminate the mispricing. Futures prices adjust less for options-initiated price disagreements with out-of-the-money (OTM) options-implied prices than they do for disagreements with at-the-money (ATM) prices. Options markets adjust more when disagreements are initiated by OTM options than they do when disagreements are initiated by ATM options. Adjustments in both the futures and options markets consistently suggest that OTM options trading provides inferior information. Price disagreements are positively correlated with the participation of domestic investors, especially when they trade OTM options, implying that domestic investors are noisier and less informed than foreign investors are.
Highlights
We examine disagreements between actual and options-implied futures prices and the corresponding adjustments.
The market in which the disagreement is initiated adjusts more to eliminate the mispricing.
Out-of-the-money options-initiated price disagreements are positively correlated with domestic investors' trades.
Performance of Japanese leveraged ETFs Miu, Peter; Yueh, Meng-Lan; Han, Jing
Pacific-Basin finance journal,
February 2021, 2021-02-00, Volume:
65
Journal Article
Peer reviewed
This study investigates the tracking performance and pricing efficiency of five groups of equity leveraged ETFs traded in Japan. One distinguishing feature of these leveraged ETFs is that they employ ...only futures contracts to achieve their desired exposures on the benchmark index. This allows us to develop a framework to determine their theoretical returns, based on the costs of carry of their underlying assets. The empirical results show that funds with positive (negative) leverage ratios tend to outperform (underperform) against their benchmarks, a pattern the opposite of US-listed equity-index tracking funds. Moreover, this outperformance/underperformance pattern concentrates on the popular ex-dividend dates of the constituent stocks of the underlying index. By using our theoretical framework, we reconcile these performance behaviors that can be attributed to the heavy reliance on futures contracts.
•Japanese leveraged ETFs employ only futures contracts to deliver target returns.•Benchmark indices of Japanese equity leveraged ETFs are derived leveraged indices.•Cost of carry model is used to study the performance of futures-based leveraged ETFs.•Feature of dividend clustering of Japanese stocks has the calendar effect on fund performance.•Funds with positive (negative) leverage ratios outperform (underperform) their targets.
In this paper, we study the relationship between futures and spot prices in the European carbon markets from the cost-of-carry hypothesis. The aim is to investigate the extent of efficiency market. ...The three main European markets (BlueNext, EEX and ECX) are analyzed during Phase II, covering the period from March 13, 2009 to January, 17, 2012. Futures contracts are found to be cointegrated with spot prices and interest rates for several maturities in the three CO2 markets. Results are similar when structural breaks are taken into account. According to individual and joint tests, the cost-of-carry model is rejected for all maturities and CO2 markets, implying that neither contract is priced according to the cost-of-carry model. The absence of the cost-of-carry relationship can be interpreted as an indicator of market inefficiency and may bring arbitrage opportunities in the CO2 market.
•We study the cost-of-carry hypothesis in the European carbon markets during Phase 2.•We apply cointegration tests with and without structural breaks on several maturities.•We find that futures contracts are cointegrated with spot prices and interest rates.•The cost-of-carry model is rejected for all maturities and carbon markets.
A number of empirical studies have focused on examining the stock index futures arbitrage. The reported results were not consistent and depended on a number of factors. Our study aims to review the ...literature on stock index futures arbitrage using meta-regression techniques. In particular, it aims to synthesize estimates on the existence of mispricing and on the relationship between mispricing and time to maturity. We do not find strong evidence on the publication bias in reported estimates on mispricing and estimates on the effect of time to maturity on mispricing. Finally, this study tests whether characteristics of data and publication determine the heterogeneity in the reported estimates on mispricing and time to maturity. The results suggest that these characteristics could explain these differences significantly.
We show that contracts for difference (CFDs) may be viable substitutes for forward contracts and may have some features that are preferable to futures contracts. We develop parity relations between ...CFDs, forwards, and futures contracts using simple cost-of-carry arguments. We use these parity relations to consider whether exchange listed stock index CFDs might be viable substitutes for exchange listed futures contracts. Using the S&P/ASX 200 stock index we find that listed CFDs (ignoring an open interest charge) generate cash flows similar to listed futures contracts. Our analysis considers stochastic interest rates and uncertain dividend payments by the shares in the index.
•Contracts for difference (CFDs) are often focused on retail clients, but may be substitutes for forward and futures contracts.•CFDs have had a regulatory and market history distinct from future and forward contracts.•Prior research finds CFDs track the underlying asset well.•Yet the exact relations between CFDs and forwards/futures have not been explored.•We establish link CFDs and forwards/futures and find they have similar (yet distinct) cash flows.
This article presents a model for the determination of crude oil futures price that focuses on the activities of arbitragers and speculators. Arbitragers, who exploit cost of carry deviations, rely ...(in part) on commodity convenience yield to identify mispriced futures contracts. However, an important impediment to this process is obtaining timely information regarding marginal convenience yield as crude oil inventory changes. This study employs an unconventional measure of convenience yield that allows for inferring inventory changes directly from spot and futures prices of the commodity. The model is tested for three and six month West Texas Intermediate futures contracts. The results show a decline in the effectiveness of arbitrage activity during the sharp rise and fall in crude oil prices in 2008. Over the same period, it is found that speculation played a greater role in the determination of crude oil prices.
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