DMC 2022 FULL ACADEMIC PROGRAMME
*ALL TIMING IS LISTED IN NZST | ||
DAY ONE | THURSDAY 8THSEPTEMBER | |
THURSDAY | WELCOME AND INTRODUCTION BY BART FRIJNS, OPEN UNIVERSITY | SESSION LINK |
THURSDAY | SESSION 1A - CORPORATE | SESSION LINK |
| CHAIRPERSON | Quan Qi, University of Kentucky | |
| PAPER | DERIVATIVE SPECULATION AND FINANCIAL FRAGILITY: EVIDENCE FROM CORPORATE BOND MUTUAL FUNDS | |
| Quan Qi, University of Kentucky | ||
| Abstract | ||
| Using derivative data from a novel SEC filing, I categorize corporate bond mutual funds into those that use derivatives for speculative versus hedging purposes. I document that bond funds that utilize derivatives for speculations are more inclined to liquidate non-derivative assets to meet payment obligations of derivative positions during the Covid-19 crisis, particularly among funds with limited liquid buffers. These forced liquidations generate substantial selling pressure in bond markets, causing sizable asset price drops and excess return volatility. My findings reinforce the recent regulatory concerns regarding the potentially destabilizing effects of speculative derivative usage among mutual funds. | ||
| PRESENTER | Quan Qi, University of Kentucky | |
| DISCUSSANT | Oliver Randall, University of Melbourne | |
| PAPER | FAIR VALUE ASSETS AND VARIANCE RISK PREMIUMS FOR FINANCIAL STOCKS | |
| Thaddeus Neururer, University of Akron | ||
| Abstract | ||
| Financial firms hold large amounts of fair value assets. However, some balance sheet values are based on quoted prices while others use model-based prices and manager inputs (opaque assets, i.e., Level 2 and Level 3 assets). I test if financial firms’ holdings of opaque assets are associated with variance risk premiums in equity options. I find that firms with large holdings of Level 3 assets have larger spreads between implied volatilities and realized volatilities along with more negative straddle returns. These results hold conditional on several other factors including industry membership, option-implied risks, and a proxy of option mispricing. I also present evidence that for larger firms, Level 2 assets are negatively associated with variance risk premiums. Finally, I show that these relationships are strongest in the final years of the sample. | ||
| PRESENTER | Thaddeus Neururer, University of Akron | |
| DISCUSSANT | Guanming He, Durham University | |
| PAPER | DERIVATIVE DISCLOSURES AND MANAGERIAL OPPORTUNISM | |
| Guanming He, Durham University | ||
| Abstract | ||
| Derivatives are increasingly used by managers not only to hedge risks but also to pursue non-hedging activities for fulfilling opportunistic incentives. The Statement of Financial Accounting Standards No. 161 (hereafter, SFAS 161) requires firms to disclose their objectives and strategies of using derivatives. Using the adoption of this standard, we examine whether and how derivative disclosures influence managerial opportunistic behaviour. We employ insider trades and stock price crash risk to capture managerial opportunism. Applying a difference-in-differences research design with hand-collected data on derivative designations, we find that, after the implementation of SFAS 161, derivative users that comply with SFAS 161 experience a significantly greater decrease in both insider trades and stock price crash risk, compared with a matched control sample of non-derivative-users. We further provide evidence to suggest that SFAS 161 curbs managerial opportunism via reducing information asymmetry between corporate insiders and outside investors and enhancing the effectiveness of derivative hedging. We find no evidence that, compared to the non-derivative-users, derivative users not compliant with SFAS 161 have a greater reduction in either insider trades or stock price crash risk in the post-SFAS-161 period, implying the importance of enhancing the enforcement of the regulation. | ||
| PRESENTER | Guanming He, Durham University | |
| DISCUSSANT | Thaddeus Neururer, University of Akron | |
THURSDAY | SESSION 1B - OPTIONS AND STOCK MARKETS | SESSION LINK |
| CHAIRPERSON | Adrian Fernandez-Perez, Auckland University of Technology | |
| PAPER | WHY DOES OPTION OPEN INTEREST PREDICT STOCK RETURNS? | |
| Yi Zhou, San Francisco State University | ||
| Abstract | ||
| We investigate the role of the information content of non-directional option open interest in the cross-sectional pricing of individual securities and equity portfolios. We find that firms with more option open interest have higher values of Tobin’s q and the effect is stronger in stocks with greater information asymmetry. Firms with more option open interest have greater corporate investment sensitivity to stock prices, higher leverage and default risk, negative earnings surprises, and lower profitability. Sorting stocks ranked into quintile portfolios by past option open interest produces spreads in average returns of approximately 62 basis points per month. | ||
| PRESENTER | Yi Zhou, San Francisco State University | |
| DISCUSSANT | Lingjie Ma, University of Illinois at Chicago | |
| PAPER | THE CONDITIONAL EXPECTED RETURN AND AUTOCORRELATION FROM THE DERIVATIVES | |
| Yueliang (Jacques) Lu, University of North Carolina at Charlotte | ||
| Weidong Tian, University of North Carolina at Charlotte | ||
| Abstract | ||
| We express conditional expected future returns and stock market autocorrelations with publicly available derivatives data. Our approach is robust to pricing kernel process choice and provides a real-time conditional point of view. We demonstrate a moderate short-term reversal of market returns with this approach. Furthermore, our approach implies comparable autocorrelation by statistical inference model with a gradually fading memory feature. We construct a reversal signal based on this approach and show that the corresponding market timing strategy outperforms the buy-and-hold strategy overall. Finally, we demonstrate that the term structure of one-month future returns is pro-cyclical. | ||
| PRESENTER | Yueliang (Jacques) Lu, University of North Carolina at Charlotte | |
| DISCUSSANT | Yi Zhou, San Francisco State University | |
| PAPER | CROSS-ASSET TIME-SERIES MOMENTUM: CRUDE OIL VOLATILITY AND GLOBAL STOCK MARKETS | |
| Adrian Fernandez-Perez, Auckland University of Technology | ||
| Ivan Indriawan, The University of Adelaide | ||
| Yiuman Tse, University of Missouri, St. Louis | ||
| Yahua Xu, Central University of Finance and Economics | ||
| Abstract | ||
| We examine the profitability of a cross-asset time-series momentum strategy (XTSMOM) constructed using past changes in crude oil implied volatility (OVX) and stock market returns as joint predictors. We show that past changes in OVX negatively predict but past stock market returns positively predict future stock market returns globally. The XTSMOM outperforms the single-asset time-series momentum (TSMOM) and buy & hold strategies with higher mean returns, lower standard deviations, and higher Sharpe ratios. The XTSMOM can also forecast economic cycles. We contribute to the literature on cross-asset momentum spillovers as well as on the impacts of crude oil uncertainty on stock markets. | ||
| PRESENTER | Adrian Fernandez-Perez, Auckland University of Technology | |
| DISCUSSANT | Alexei G. Orlov, U.S. Commodity Futures Trading Commission | |
THURSDAY | BREAK | |
THURSDAY | SESSION 2A - SENTIMENT | SESSION LINK |
| CHAIRPERSON | John Hua Fan, Griffith University | |
| PAPER | WISDOM OF CROWDS AND COMMODITY PRICING | |
| John Hua Fan, Griffith University | ||
| Sebastian Binnewies, Griffith University | ||
| Sanuri De Silva, Griffith University | ||
| Abstract | ||
| We extract commodity-level sentiment from the Twittersphere in 2009-2020. A long-short systematic strategy based on sentiment shifts more than doubles the Sharpe ratio of extant commodity factors. The sentiment premium is unrelated to fundamentals but is exposed negatively to basis risk and is more pronounced during periods of macro contraction and deteriorating funding liquidity. Sentiment-induced mispricing is asymmetric, i.e., commodities with low (high) sentiment shifts tend to be overvalued (undervalued) when the aggregate market is in backwardation (contangoed). Furthermore, the observed premium arises almost entirely from commodities with the most retweet activities, while retweets and likes themselves do not exhibit stronger predictive ability compared to non-influential tweets. | ||
| PRESENTER | John Hua Fan, Griffith University | |
| DISCUSSANT | Zin Yau Heng, University of Queensland | |
| PAPER | OPTION-IMPLIED FIRM-LEVEL SENTIMENT AND STOCK RETURNS | |
| Gady Jacoby, College of Management Academic Studies | ||
| Fuwei Jiang, Central University of Finance and Economics | ||
| Lei Lu, University of Manitoba | ||
| Qi Zhang, University of Manitoba | ||
| Abstract | ||
| We propose a novel firm-specific investor sentiment measure—the daily change in the open interest weighted implied volatility ratio of out-of-the-money (OTM) calls over that of OTM puts. To validate this ratio as a sentiment measure, we show that, at the aggregate, our firm-level sentiment measure is highly correlated with existing market-level sentiment indices. We find that an increase in our aggregate market sentiment measure predicts a short-term stock return increase with a subsequent reversal. We then proceed to examine how our firm-level sentiment measure affects returns in the cross section. A long-short portfolio strategy, based on a long position in the high-sentiment portfolio and a short position in the low-sentiment portfolio, generates a significant abnormal return of 70 bps per month (8.73% annualized). This effect of sentiment on stock returns is more pronounced for hard-to-value stocks, which are small, young, high-volatility, and less-liquid stocks. Finally, we apply a Fama-MacBeth regression at the stock level to show that a higher sentiment in the current period predicts a higher return next period. | ||
| PRESENTER | Qi Zhang, University of Manitoba | |
| DISCUSSANT | Sumit Saurav, Indian Institute of Management Ahmedabad | |
| PAPER | SPILLOVER BETWEEN INVESTOR SENTIMENT AND VOLATILITY: THE ROLE OF SOCIAL MEDIA | |
| Ni Yang, Auckland University of Technology | ||
| Adrian Fernandez-Perez, Auckland University of Technology | ||
| Ivan Indriawan, The University of Adelaide | ||
| Abstract | ||
| This study examines the attributes of informational spillover across different asset volatilities and social media sentiments. Specifically, we uncover the spillover effect between investor sentiment and market implied volatility among stock, bond, foreign exchange, and commodity markets. We find that sentiments and volatilities are weakly connected. There is a stronger spillover from the market-specific volatility to the sentiment of the same market, but a marginal effect the other way round. Second, the informational spillover is mainly from market volatilities to market sentiments, and the most significant net transmitter is the VIX. Third, the connectedness of market sentiment and volatility increases in turbulent economic periods. Lastly, the role of sentiments can switch from net receiver to net transmitter at turmoil times. | ||
| PRESENTER | Ni Yang, Auckland University of Technology | |
| DISCUSSANT | Yueliang (Jacques) Lu, University of North Carolina at Charlotte | |
THURSDAY | SESSION 2B - ANNOUNCEMENTS/NEWS | SESSION LINK |
| CHAIRPERSON | Stephen Figlewski, New York University | |
| PAPER | WHAT MOVES THE MARKET? INDIVIDUAL FIRMS’ EARNINGS ANNOUNCEMENTS VERSUS MACRO RELEASES AS DRIVERS OF INDEX RETURNS | |
| Maria Ogneva, Marshall School of Business | ||
| Jingjing Xia, Wenzhou-Kean University | ||
| Tiange Ye, University of Southern California | ||
| Abstract | ||
| In this paper, we characterize the relative importance of two sources of fundamental market-wide news—large firms’ earnings announcements and macroeconomic releases. Our investigation is motivated by growing concerns in the financial community about the increasing impact of individual firms’ news on the broad stock market indices and the disconnect between the stock market and the economy at large. We leverage the S&P500 index futures data and use narrow intraday and overnight windows to isolate the market-wide reactions to earnings and macro announcements. We find that earnings announcements represent an economically significant source of index-level market activity—an average earnings announcement experiences around 21% (47%) of abnormal volatility (trading volume) associated with an average macroeconomic release. The returns earned over earnings announcement windows serve as a significant driver of daily index price movement. Importantly, earnings announcements’ contribution to index-level volatility has been relatively stable over our sample period from 2004 to 2018, while we observe a drastic decrease in the volatility explained by macro announcements. The latter is consistent with a growing disconnect between the stock market and the broader macroeconomy. | ||
| PRESENTER | Jingjing Xia, Wenzhou-Kean University | |
| DISCUSSANT | Prasad Hegde, Auckland University of Technology | |
| PAPER | VARIANCE RISK PREMIUM TERM STRUCTURE AND MONETARY POLICY | |
| Xiaoman Su, Heng Feng Bank | ||
| Chardin Wese Simen, University of Liverpool | ||
| Abstract | ||
| In this paper, we find that the changes in the variance risk premium (VRP) which reflects the market price of variance risk positively respond to the interest rate shocks and the strength of response declines with maturity. The shape of the response is mainly driven by the reactions of implied variance and bad VRP. Additionally, timing surprise, expansionary policy, and negative surprise matter for the effects. Overall, investors are sensitive to the downside variance risk and require a higher variance risk premium as compensation for the increased risk. | ||
| PRESENTER | Xiaoman Su, Heng Feng Bank | |
| DISCUSSANT | Junyu Zhang, University of Otago | |
| PAPER | DOES OPTIONS TERM STRUCTURES REFLECTS RISKS? | |
| Fei Gao, Singapore Institute of Technology | ||
| Bingqiao Li, Singapore Institute of Technology | ||
| Abstract | ||
| Information embedded in options market is commonly used to predict underlying stock returns and volatility. While implied volatility is well-studied in the literature, options’ time-to-maturity (TTM) has received relatively little attention. This paper examines the TTM of single stock options and tests whether it reflects company’s risks. By aggregating TTM using options‘ trading volume into volume-weighted maturity (V WM), we find that on average option investors tend to choose shorter term options if the perceived underlying stock has more uncertainty in the following trading day. When longer term options are traded at the aggregate level, the following underlying stock return would be larger on average. | ||
| PRESENTER | Fei Gao, Singapore Institute of Technology | |
| DISCUSSANT | Xiaoman Su, Heng Feng Bank | |
THURSDAY | BREAK | |
THURSDAY | KEYNOTE ADDRESS | SESSION LINK |
| PROFESSOR CAROL ALEXANDER, SUSSEX UNIVERSITY BUSINESS SCHOOL | ||
| HEDGING CRYPTO DERIVATIVES | ||
| Crypto derivatives markets have unique products which are traded in self-regulated markets where leverage can be huge and there are no margin calls. Winning positions can be automatically deleveraged and losing positions may be liquidated automatically by the exchange with the trader being declared bankrupt. To accommodate the unique products and microstructure of these self-regulated crypto derivatives exchanges, the market makers need to employ hedging strategies that are quite different from those used in traditional financial markets. Focussing on bitcoin derivatives, this talk provides an overview of two recent papers on hedging with futures and delta hedging options. | ||
THURSDAY | BREAK | |
THURSDAY | SESSION 3 A - LIQUIDITY | SESSION LINK |
| CHAIRPERSON | Oliver Randall, University of Melbourne | |
| PAPER | BOND MUTUAL FUNDS: SYSTEMIC LIQUIDITY AND DERIVATIVE USE | |
| Minsoo Kim, University of Melbourne | ||
| Oliver Randall, University of Melbourne | ||
| Abstract | ||
| We show, both theoretically and empirically, that there is a systemic component to liquidity management by bond mutual funds. Through cash holdings and bond prices, funds are interconnected: a fund’s optimal portfolio choice depends not only on the fund’s own cash holdings but also on all the other funds’ cash holdings, because an aggregate cash shortfall during outflows induces downward price pressure on bonds which the fund may need to sell. This is especially important during crisis periods for bond mutual funds, who exhibit a pecking order from liquidating cash to less liquid corporate bonds when financing fund outflows. We use novel data on derivative holdings to document large cross-sectional variation in how bond mutual funds use them, and its implications on liquidity management: some hedging their returns, some amplifying them, some not using them at all. | ||
| PRESENTER | Oliver Randall, University of Melbourne | |
| DISCUSSANT | Quan Qi, University of Kentucky | |
| PAPER | HOW DOES STANDARDIZATION WORK IN DERIVATIVE MARKETS? EVIDENCE FROM THE OPTIONS ON JGB FUTURES | |
| Takahiro Hattori, University of Tokyo | ||
| Abstract | ||
| To be listed on the exchange market, derivative products are standardized, which contributes to the existence of the highest liquid derivative market. However, standardization could deteriorate liquidity if it does not appropriately match market conditions and investor needs. In this study, we take advantage of the Japan Exchange Group’s（JPX）reform of the standardization of Japanese Government Bond (JGB) futures options. Under low yield and volatility in the JGB market, the JPX has changed the strike price intervals of the JGB futures options from JPY 0.5 to JPY 0.25, which is the first attempt by the Exchange to change the strike prices of bond futures options as far as we know. Using this reform, we empirically demonstrate that the JPX reform improves liquidity in the options on JGB Futures market. | ||
| PRESENTER | Takahiro Hattori, University of Tokyo | |
| DISCUSSANT | Ruggero Jappelli, Goethe University and Leibniz Institute for Financial Research SAFE | |
| PAPER | LIQUIDITY DERIVATIVES | |
| Matteo Bagnara, Goethe University and Leibniz Institute for Financial Research SAFE | ||
| Ruggero Jappelli, Goethe University and Leibniz Institute for Financial Research SAFE | ||
| Abstract | ||
| It is well established that investors price market liquidity risk. Yet, there exists no financial claim contingent on liquidity. We propose a contract to hedge uncertainty over future transaction costs, detailing potential buyers and sellers. Introducing liquidity derivatives in Brunnermeier and Pedersen (2009) improves financial stability by mitigating liquidity spirals. We simulate liquidity option prices for a panel of NYSE stocks spanning 2000 to 2020 by fitting a stochastic process to their bid-ask spreads. These contracts reduce the exposure to liquidity factors. Their prices provide a novel illiquidity measure reflecting cross-sectional commonalities. Finally, stock returns significantly spread along simulated prices. | ||
| PRESENTER | Ruggero Jappelli, Goethe University and Leibniz Institute for Financial Research SAFE | |
| DISCUSSANT | Takahiro Hattori, University of Tokyo | |
THURSDAY | SESSION 3B – BEHAVIORAL FINANCE | SESSION LINK |
| CHAIRPERSON | Zin Yau Heng, University of Queensland | |
| PAPER | THE ROLE OF OPTION-BASED INFORMATION ON STOCKTWITS, OPTIONS TRADING VOLUME AND STOCK RETURNS | |
| Zin Yau Heng, University of Queensland | ||
| Henry Leung, University of Sydney | ||
| Abstract | ||
| We examine the relation between activities of information channels and stock returns. The activities of information channels are signals from option trading market and sentiments of StockTwits. Besides, we also examine whether those activities are shared across the information channels. We use a net trade option volume ratio as a proxy for signals from the options market and use bullishness and agreement variable as proxies for activities of StockTwits. We partition the net trade option volume by different option maturity lengths and moneyness. We find that signals from all option maturity lengths and moneyness except for the medium and deeply out of the money groups have positive and significant association with bullish sentiment. Second, we show significant evidence of pooling equilibrium activities between stock market and information channels. The pooling equilibrium activities exhibit that informed investor not only invest in the option market and sending bullish information through option market and StockTwits. Third, the signals from options with deep leverage show possible positive and significant future returns. Fourth, the signals from options market (with ATM, ITM, DITM, and DOTM groups) have a significant and positive association with agreements on StockTwits. Fifth, the agreement on sentiments has a possible positive and significant association with the current and future stock returns. | ||
| PRESENTER | Zin Yau Heng, University of Queensland | |
| DISCUSSANT | Ni Yang, Auckland University of Technology | |
| PAPER | OVERREACTION TO VOLATILITY SHOCK AND OPTION RETURNS | |
| Jingda Yan, Hong Kong University of Science and Technology | ||
| Abstract | ||
| I show that overreaction to the volatility shock generates a demand pressure for stock options with high volatility shock, making such options overpriced. Empirically, I find that straddles written on high variance change stocks underperform those on low variance change stocks by 5.30% per month. Volatility uncertainty and other risk factors can’t explain my results. Further decomposition result shows that the idiosyncratic com-ponent of the variance change is the driving force for this return predictability. Variance risk premium regressions corroborating with earnings announcement test confirm investors overreact to the idiosyncratic component of the variance change, which generates the demand pressure. Dealers charge higher premiums and bid-ask spreads as compensation for the increased market making risk caused by the demand pressure. | ||
| PRESENTER | Jingda Yan, Hong Kong University of Science and Technology | |
| DISCUSSANT | Ti Zhou, Southern University of Science and Technology | |
| PAPER | BELIEF DISTORTION NEAR 52W HIGH AND LOW: EVIDENCE FROM EQUITY OPTIONS MARKET | |
| Sumit Saurav, Indian Institute of Management Ahmedabad | ||
| Sobhesh Kumar Agarwalla, Indian Institute of Management Ahmedabad | ||
| Jayanth R. Varma, Indian Institute of Management Ahmedabad | ||
| Abstract | ||
| We examine investors’ behavioral biases and preferences in the options market near 52-Week high and low (52W-H/L). We document that as the stock price approaches 52W high (low), the skewness of RND and out-of-the-money (OTM) call volume decreases (increases), while OTM put volume increases (decreases). After crossing the 52W high(low), the skewness of RND and OTM call volume increases (decreases), while OTM put volume decreases (increases). The effects are economically large and significant. Our findings provide evidence consistent with anchoring theory of belief distortion near 52W-H/L. There is no evidence of preference distortion, contrary to what prospect theory predicts. | ||
| PRESENTER | Sumit Saurav, Indian Institute of Management Ahmedabad | |
| DISCUSSANT | Jingda Yan, Hong Kong University of Science and Technology | |
END OF DAY ONE | ||
DAY TWO | FRIDAY 9THSEPTEMBER | |
FRIDAY | SESSION 4 A - COMMODITIES | SESSION LINK |
| CHAIRPERSON | Bart Frijns, Open University | |
| PAPER | NIGHT TRADING MOMENTUM AND DETERMINANTS OF PREDICTABILITY: EVIDENCE FROM CHINESE METAL FUTURES MARKET | |
| Elie Bouri, Lebanese American University | ||
| Gaoping Ma, Central University of Finance and Economics | ||
| Yahua Xu, Central University of Finance and Economics | ||
| Z. Ivy Zhou, University of Wollongong | ||
| Abstract | ||
| In this paper, we analyse the impact of the launch of night trading, a unique trading mechanism in China, on intraday momentum in four Chinese metal futures markets, namely gold, silver, aluminium, and copper. Based on high-frequency (1-minute) data, we find that before the launch of night trading, the first half-hour return in the daytime has a positive predictability for half-hour returns later in the same day in the four markets, but not necessarily the last half-hour returns as often found in the stock market. After the launch of night trading, the predictive ability of the first half-hour return in the daytime disappears, whereas the first half-hour returns at the night trading becomes the new efficient predictor. As a possible explanation for the change of intraday predictive patterns, we refer to the immediate reaction of domestic investors to international news released in the evening. We further provide evidence that the magnitude of the intraday predictability varies with levels of realized volatility, trading volume, and illiquidity. Additional analysis shows that the profits generated by a market timing strategy based on our findings exceed those of the always-long benchmark strategy. | ||
| PRESENTER | Yahua Xu, Central University of Finance and Economics | |
| DISCUSSANT | Adrian Fernandez-Perez, Auckland University of Technology | |
| PAPER | FORECASTING THE PRICE OF CRUDE OIL WITH A STRUCTURAL MODEL | |
| Lingjie Ma, University of Illinois at Chicago | ||
| Abstract | ||
| The price of oil (WTI) has been extremely volatile recently due to many factors, such as shifts in geopolitical power, supply of major producers such as Saudi Arabia, war, demand from China, and the COVID-19 pandemic, to name a few. In this paper, I investigate fundamental sources of crude oil price movements, identify factors that impact the long-term trend and short-term fluctuations, respectively, and propose a structural two-equation model to forecast the price of oil. The 10-yearout-of-sample price forecasts shows the strong efficacy of this structural approach in terms of both the model alpha accuracy and the portfolio performance. | ||
| PRESENTER | Lingjie Ma, University of Illinois at Chicago | |
| DISCUSSANT | Daxuan Cheng, Macquarie University | |
| PAPER | THE PRICING OF GEOPOLITICAL RISK IN CROSS-SECTIONAL COMMODITY RETURNS | |
| Daxuan Cheng, Macquarie University | ||
| Yin Liao, Macquarie University | ||
| Zheyao Pan, Macquarie University | ||
| Abstract | ||
| In this study, we investigate whether geopolitical risk is a pricing factor in cross-sectional commodity futures returns. By estimating the exposure of commodity futures returns on a historical geopolitical risk index, we find that commodities with high-risk betas generate 7.92% higher annual returns than those with low-risk betas. The results indicate that high geopolitical risk-related commodity futures contracts require extra compensation. A moving average procedure shows that the geopolitical risk beta has a regular changing pattern that cycles every 10 years, and the relative risk premium tends to be higher than average before economic recessions and to further increase during the recession periods. Finally, we find that geopolitical threats better explain the variation of commodity futures return than do geopolitical actions. | ||
| PRESENTER | Daxuan Cheng, Macquarie University | |
| DISCUSSANT | John Hua Fan, Griffith University | |
FRIDAY | SESSION 4 B - OPTIONS/MATHEMATICAL FINANCE | SESSION LINK |
| CHAIRPERSON | José Da Fonseca, Auckland University of Technology | |
| PAPER | PRICING PATH-DEPENDENT OPTIONS UNDER STOCHASTIC VOLATILITY VIA MELLIN TRANSFORM | |
| Jiling Cao, Auckland University of Technology | ||
| Jeong-Hoon Kim, Yonsei University | ||
| Xi Li, Auckland University of Technology | ||
| Wenjun Zhang, Auckland University of Technology | ||
| Abstract | ||
| In this paper, we derive closed-form formulas of first-order approximation for down-and-out barrier and floating strike lookback put option prices under a stochastic volatility model, by using an asymptotic approach. To find the explicit closed-form formulas for the zero-order term and the first-order correction term, we use Mellin transform. We also conduct a sensitivity analysis on these formulas and compare the option prices calculated by them with those generated by Monte-Carlo simulation. | ||
| PRESENTER | Xi Li, Auckland University of Technology | |
| DISCUSSANT | Komi Edem Dawui, The World Bank | |
| PAPER | COVARIANCE RISK PREMIUM | |
| Xiaolan Jia, University of Otago | ||
| Xinfeng Ruan, University of Otago | ||
| Jin E. Zhang, University of Otago | ||
| Abstract | ||
| Covariance risk premium (CRP), defined as the difference between the historical and the risk-neutral covariance rates (HC and RC) of the implied volatility changes and the market index returns, is positively and significantly related to future stock market returns at horizons from 1 month to 24 months. This paper empirically documents that CRP has significant in-sample, and out-of-sample predictive ability, generates sizable economic value for a mean-variance investor and outperforms many well-known predictors. In addition, CRP can predict cross-sectional stock returns at the portfolio level. | ||
| PRESENTER | Xinfeng (Edwin) Ruan, University of Otago | |
| DISCUSSANT | Xi Li, Auckland University of Technology | |
| PAPER | CMS DERIVATIVES PRICING IN THE LINEAR-RATIONAL WISHART MODEL | |
| José Da Fonseca, Auckland University of Technology | ||
| Komi Edem Dawui, The World Bank | ||
| Yannick Malevergne, Université Paris | ||
| Abstract | ||
| This study derives analytical pricing formulas for the constant maturity (CMS) and related derivatives in a linear-rational multi-curve term structure model based on the Wishart process. In the proposed approach, using the affine property of the Wishart process and the linear rational structure of the model, it is shown how the CMS price can be efficiently approximated by using a polynomial function of the Wishart model parameters. This methodology is also applied to the pricing of other CMS derivatives such as the CMS spread option and leads to fast and accurate approximation results. Using a calibrated model on market data, the approximation results compared to a Monte Carlo approach confirm the accuracy of the method. The approach is in fact very versatile as it can also be applied to other interest rate derivatives such as the in-arrears swap or in-arrears cap. | ||
| PRESENTER | Komi Edem Dawui, The World Bank | |
| DISCUSSANT | Xinfeng (Edwin) Ruan, University of Otago | |
FRIDAY | BREAK | |
FRIDAY | KEYNOTE ADDRESS | SESSION LINK |
| PROFESSOR STEPHEN FIGLEWSKI, OF NEW YORK UNIVERSITY | ||
PERSPECTIVES ON VOLATILITY AND EQUITY MARKET OPTIONS FROM FIVE DECADES OF RESEARCH | ||
In 1973 the Black-Scholes model was published and the Chicago Board Options Exchange was founded to trade standardized option contracts. We understood immediately that volatility was the crucial parameter in the model. Given a volatility input and a few directly observable parameters, the model yields a theoretical option value. But also, and more importantly for market participants, given the option's market price, the model can be inverted to yield the market's "implied volatility". Over the decades, volatility in option modeling has evolved from a single number that one could compute from past stock returns into a dynamic process with a stochastic diffusive component and stochastic jumps. The implied volatility of the underlying stock extracted from its options became the "volatility smile," then a "volatility surface" with its own somewhat mysterious dynamics, and finally an entire "risk-neutral" probability density (RND) over future states of the world. The RND embeds both the market's objective probability estimates and its risk aversion, tremendously valuable information, but the research challenge is to separate objective probability estimates from the risk-neutralization. | ||
FRIDAY | BREAK | |
FRIDAY | SESSION 5 A - FORECASTING | SESSION LINK |
| CHAIRPERSON | Alireza Tourani-Rad, Auckland University of Technology | |
| PAPER | INTERNATIONAL STOCK RETURN PREDICTABILITY: THE ROLE OF U.S. VOLATILITY RISK | |
| Yizhe Deng, Ping An Bank, | ||
| Fuwei Jiang, Central University of Finance and Economics | ||
| Yunqi Wang, Southern University of Science and Technology | ||
| Ti Zhou, Southern University of Science and Technology | ||
| Abstract | ||
| We study the impact of U.S. equity volatility risk on international equity risk premia. A single factor constructed from the term structure of U.S. option-implied forward variance consistently predicts the stock market returns on the U.S. and 10 non-U.S. industrialized countries both in- and out-of-sample. The predictability of the U.S. forward variance factor is stronger when the U.S. volatility spillover intensity is higher or when global stock markets are more connected. We find that the information in the U.S. forward variances is linked to the U.S. macroeconomy and helps to predict the changes in local economic activity and economic uncertainty, suggesting that the predictive ability of the factor stems from the impact of U.S. volatility on the global investment opportunities. Overall, our evidence is consistent with an inter-temporal capital asset pricing model and underscores the role of the U.S. volatility in shaping the international risk-return trade off. | ||
| PRESENTER | Ti Zhou, Southern University of Science and Technology | |
| DISCUSSANT | William J. Procasky, Texas A&M University, Kingsville | |
| PAPER | THE ROLE OF RISK-NEUTRAL MOMENTS IN FORECASTING FUTURE REALISED VOLATILITY: AN INTERNATIONAL PERSPECTIVE | |
| Junyu Zhang, University of Otago | ||
| Xinfeng Ruan, University of Otago | ||
| Jin E. Zhang, University of Otago | ||
| Abstract | ||
| This paper estimates the predictability of future volatility on eleven stock markets by using the risk-neutral moments of corresponding international proxy ETFs. Our evidence shows that the risk-neutral standard deviation and excess kurtosis can positively and negatively predict the future volatility, respectively, while the predictive significance of risk-neutral skewness is relatively weaker but can negatively predict the future volatility in some locations. Results from model confidence set analysis show that incorporating location-based risk-neutral moments into the HAR-RV model can improve the predictability of future volatility in some markets, while volatilities in all markets are sensitive to international-combined risk-neutral moments, where these aggregated factors can significantly enhance the predictive power. | ||
| PRESENTER | Junyu Zhang, University of Otago | |
| DISCUSSANT | Qi Zhang, University of Manitoba | |
| PAPER | THE IMPACT OF COVID-19 ON THE RELATIVE MARKET EFFICIENCY AND FORECASTING ABILITY OF CREDIT DERIVATIVE AND EQUITY MARKETS | |
| William J. Procasky, Texas A&M University, Kingsville | ||
| Anwen Yin, Texas A&M International University | ||
| Abstract | ||
| While there has been a significant amount of research related toCOVID-19’simpact on financial markets, we address the potential change in relative market efficiency and associated forecasting power for the first time. Specifically, we examine the impact of COVID-19 on previously observed predictive power of cross-market informational flow in the high yield CDS and equity markets. Our analysis reveals that contrary to historically documented greater forecasting ability during periods of high volatility, a very significant structural break occurred with COVID-19 in which neither market demonstrated any predictive power with respect to the other. This indicates that investors reacted to the pandemic and new information coming to market very differently than in the past. Moreover, we observe that the structural break only lasted four months, which we attribute to the success of the unprecedented monetary and fiscal stimulus measures in stabilizing financial markets. Finally, we note the break was more severe in the equity than in the CDS markets, a finding consistent with the CDS market having an overall informational advantage over the equity market. | ||
| PRESENTER | William J. Procasky, Texas A&M University, Kingsville | |
| DISCUSSANT | Jingjing Xia, Wenzhou-Kean University | |
FRIDAY | SESSION 5 B -VOLATILITY | SESSION LINK |
| CHAIRPERSON | Guanglian Hu, University of Sydney | |
| PAPER | HARVESTING THE VOLATILITY SMILE: A DYNAMIC NELSON SIEGEL APPROACH | |
| Sudarshan Kumar, IIM Calcutta | ||
| Abstract | ||
| While there is a large literature on modelling volatility smile in options markets, almost all such studies are eventually focused on the forecasting performance of the model parameters and not on the applicability of the models in a trading environment. Drawing on the analogy of a volatility smile as interest rate term structure, we evaluate the performance of the Dynamic Nelson Siegel approach to model the dynamics of volatility smile in a trading environment against competing alternatives. Based on rank ordering of options identified by model-based mispricing, our trading strategy is to go long the options in the upper deciles and going short the options in the lower deciles. We show that, in general, dynamic models outperform their static counterparts, with the worst dynamic model outperforming the best static model in terms of percentage of positive returns from the trading portfolios and the Sharpe ratio. Specifically, we find that the Dynamic Nelson Siegel model consistently outperforms all other competing specifications on most of our selected criteria. | ||
| PRESENTER | Sudarshan Kumar, IIM Calcutta | |
| DISCUSSANT | Asli Eksi, Salisbury University | |
| PAPER | NON-FUNDAMENTAL SHOCKS AND IMPLIED VOLATILITY SKEW: EVIDENCE FROM S&P 500 INDEX INCLUSIONS | |
| Asli Eksi, Salisbury University | ||
| Abstract | ||
| Using S&P 500 index inclusions, we examine how a non-fundamental demand shock on the stock price affects the price structure of equity options. We find that the implied volatility skew of stocks added to the index becomes steeper in the months following index inclusion. This effect is not caused by an increase in systematic risk or the pre-inclusion momentum of added stocks. It exists only for stocks that experience a high index addition announcement return and fades after the announcement return reverses. Moreover, the implied volatility skew predicts next month’s return for added stocks, but this predictability is mainly driven by return reversals. Overall, our results are consistent with the notion that options market participants trade based on anticipated return reversals when stock prices deviate from their fundamental values, which can lead to options’ predictability of stock returns beyond the well-known informed trading channel. | ||
| PRESENTER | Asli Eksi, Salisbury University | |
| DISCUSSANT | Guanglian Hu, University of Sydney | |
| PAPER | DIFFERENTIAL PRICING OF STOCK MARKET VOLATILITY RISKS | |
| Guanglian Hu, University of Sydney | ||
| Abstract | ||
| This paper studies the pricing of realized, option implied (i.e., expected risk neutral volatility), and expected (physical) market volatilities in the cross-section of stock returns. Consistent with the notion that volatility shocks are viewed as bad, and investors pay a premium for hedging against increases in volatility, I find that stocks with high sensitivities to changes in realized volatility and expected volatility have significantly low average returns. On the other hand, implied volatility is not priced in the cross-section of stock returns. The differential pricing of market volatility risks is hard to reconcile with standard theories of the volatility risk premium but is potentially consistent with segmentation between options and equity markets. | ||
| PRESENTER | Guanglian Hu, University of Sydney | |
| DISCUSSANT | Sudarshan Kumar, IIM Calcutta | |
FRIDAY | BREAK | |
FRIDAY | SESSION 6 A - MARKET MICROSTRUCTURE/REGULATIONS | SESSION LINK |
| CHAIRPERSON | Alexei G. Orlov, U.S. Commodity Futures Trading Commission | |
| PAPER | LEVERAGE CONSTRAINTS AND INVESTORS' CHOICE OF UNDERLYINGS | |
| Matthias Pelster, Paderborn University | ||
| Abstract | ||
| This paper investigates the impact of a 2018 intervention by the European Securities and Markets Authority (ESMA) limiting the amount of leverage that investors can take on their trading activities. While it successfully reduced the leverage-usage, investors shifted their trading activities to riskier assets in the process, consistent with the idea that leverage-constraint investors substitute leverage with riskier securities. Thus, the intervention was not as effective as the reduction in leverage suggests. Consistent with the notion that risky investment strategies spread through the population, I find some evidence of spillover effect to investors who are not affected by the regulatory intervention. | ||
| PRESENTER | Matthias Pelster, Paderborn University | |
| DISCUSSANT | Fei Gao, Singapore Institute of Technology | |
| PAPER | SPILLOVERS OF CUM-EX AND CUM-CUM TRADING WITH SINGLE STOCK FUTURES | |
| Valerie Laturnus, University of Frankfurt | ||
| Arne Reichel, University of Frankfurt | ||
| Mark Wahrenburg, University of Frankfurt | ||
| Abstract | ||
| We examine single stock future (SSF) trading and respective underlying around dividend ex-dates to study a specific form of dividend tax arbitrage, widely known as cum-ex and cum-cum trading, across Europe. Both strategies are designed to profit from illicit refunds of tax withheld from dividends. Our results document trading spillovers into more favourable tax regimes, while the excessive trading disappear in markets with enacted tax reforms. In cum-ex trades, SSF have been mispriced to share the realized gains between colluding parties. Ex-day stock price drops are largely unaffected. All findings are robust to controls, such as transaction cost, volatility, and institutional ownership. | ||
| PRESENTER | Valerie Laturnus, University of Frankfurt | |
| DISCUSSANT | Matthias Pelster, Paderborn University | |
| PAPER | HIGH-FREQUENCY TRADING AND MARKET QUALITY: EVIDENCE FROM ACCOUNT-LEVEL FUTURES DATA | |
| John Coughlan, U.S. Commodity Futures Trading Commission | ||
| Alexei G. Orlov, U.S. Commodity Futures Trading Commission | ||
| Abstract | ||
| We use rich regulatory data on intraday transactions and end-of-day positions of traders in nine futures markets over the past ten years to examine how participation of high-frequency traders (HFTs) affects market quality. Absence of market fragmentation and off-exchange trading in the contracts under consideration, as well as our use of traded bid-ask spreads in addition to the Amihud price impact, allow for a reliable measurement of market quality and HFT activity. Panel estimation evidence shows that greater participation by HFTs is strongly associated with improvements in market quality, although higher rates of aggressive trading on the part of the HFTs, such as those observed when HFTs trade directionally to reduce their positions, produce an adverse effect on market quality. Our results suggest that the market quality improvements brought about by HFTs’ market-making outweigh the negative effects of HFTs’ aggressive directional trading. We also find that while futures contracts are sensitive to market uncertainty, as measured by VIX, they are even more sensitive to own price volatility. Additionally, we take advantage of the 2015 change in CME’s daily settlement methodology for agricultural commodities to address potential endogeneity using a fixed-effects difference-in-difference setup. Our results are robust to relying on alternative estimation techniques, using overly conservative (clustered) standard errors. | ||
| PRESENTER | Alexei G. Orlov, U.S. Commodity Futures Trading Commission | |
| DISCUSSANT | Valerie Laturnus, University of Frankfurt | |
FRIDAY | SESSION 6 B - CRYPTOCURRENCIES | SESSION LINK |
| CHAIRPERSON | Jiasun Li, George Mason University | |
| PAPER | BITCOIN FLASH CRASH ON MAY 19, 2021: WHAT DID REALLY HAPPEN ON BINANCE? | |
| Tim Baumgartner, Ulm University | ||
| Andre Guettler, Ulm University | ||
| Francis Kim, 80bots | ||
| Abstract | ||
| Bitcoin plunged by 30% on May 19, 2021. We examine the outage the largest crypto exchange Binance experienced during the crash, when it halted trading for retail clients and stopped providing transaction data. We find evidence that Binance backfilled these missing transactions with data that does not conform to Binford’s Law. The Bitcoin futures price difference between Binance and other exchanges was seven times larger during the crash period compared to a prior reference period. Data manipulation is a plausible explanation for our findings. These actions are in line with Binance aiming to limit losses for its futures-related insurance fund. | ||
| PRESENTER | Tim Baumgartner, Ulm University | |
| DISCUSSANT | Jiasun Li, George Mason University | |
| PAPER | FACTOR STRUCTURE OF CRYPTO CURRENCIES | |
| Yeguang Chi, Auckland University | ||
| Wenyan Hao, University of Leicester | ||
| Jiangdong Hu, University of California | ||
| Zhenkai Ran, University of Cambridge | ||
| Abstract | ||
| We investigate the cross-section asset-pricing patterns of major cryptocurrencies from 2017 to 2021. We show basis, momentum, and basis momentum factors earn statistically significant excess returns, a result consistent with the commodity futures literature. We document meaningful evidence that contrast the future returns within the factor structure. Daily factor returns are statistically and economically much stronger than weekly factor returns. Monthly factor returns are non-significant. | ||
| PRESENTER | Yeguang Chi, Auckland University | |
| DISCUSSANT | Tim Baumgartner, Ulm University | |
| PAPER | ILLIQUID BITCOIN OPTIONS | |
| Yang Guo, Tsinghua University | ||
| Jiasun Li, George Mason University | ||
| Mei Luo, Tsinghua University | ||
| Yintian Wang, Tsinghua University | ||
| Abstract | ||
| This paper conducts a first look into the regulated Bitcoin options market in the United States. Compared to stock options, bitcoin options tend to be ten times more illiquid as measured by bid-ask spreads. The illiquidity significantly affects bitcoin options pricing: Given that investors are on average net sellers of bitcoin options, heightened illiquidity is associated with a significant premium in subsequent delta-hedged returns, which also strengthens under more imbalanced investor orders. To support the reasonings behind our findings, we further exploit a policy change which allows retail participation and significantly influences order imbalances in the Bitcoin options market. | ||
| PRESENTER | Jiasun Li, George Mason University | |
| DISCUSSANT | Yeguang Chi, Auckland University | |
FRIDAY | CLOSING REMARKS AND PAPER AWARDS BY ALIREZA TOURANI-RAD, AUCKLAND UNIVERSITY OF TECHNOLOGY | SESSION LINK |