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Trading patience, order flows and liquidity in an index futures market
Stockholm University, Faculty of Social Sciences, Stockholm Business School, Finance.
2014 (English)In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 34, no 8, 731-756 p.Article in journal (Refereed) Published
Abstract [en]

This study investigates the limit order book characteristics and the intertwined dynamics between trading patience, order flows, and liquidity in an index futures market. The limit order book displays a hump shape and the steepness of the hump is positively related to the number of large market orders. Bid and ask prices tend to move together in the same direction. Moreover, higher proportion of patient traders and higher order arrival rate lead to higher liquidity, after controlling for volatility and the intraday time effect. Liquidity is found to have a feedback effect on trading patience and the order arrival rate. 

Place, publisher, year, edition, pages
John Wiley & Sons, 2014. Vol. 34, no 8, 731-756 p.
Keyword [en]
Index futures, trading patience, order flows, liquidity
National Category
Business Administration
Research subject
Business Administration
Identifiers
URN: urn:nbn:se:su:diva-94663DOI: 10.1002/fut.21664ISI: 000339434400002OAI: oai:DiVA.org:su-94663DiVA: diva2:654774
Available from: 2013-10-08 Created: 2013-10-08 Last updated: 2017-12-06Bibliographically approved
In thesis
1. Essays on Derivatives and Liquidity
Open this publication in new window or tab >>Essays on Derivatives and Liquidity
2013 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This dissertation contains four essays in which derivatives markets are studied in relation to three related topics in financial economics: asset pricing, market microstructure and risk management.

Essay I studies the role of relative option liquidity in explaining the volatility smile.We find that option happiness (the steepness of the volatility smile) is significantly dependent on the relative liquidity between option series with different moneyness. This relationship is robust to relative option liquidity measures based on bid-ask spreads, option price impacts, and option order book imbalances.

Essay II examines the consequences of a unique event on expiration-day effects, namely the synchronizing of the expiration days of different derivatives contracts in Sweden. The results show that there is no significant intensification of expiration-day effects due to the event, despite the quadruple witching expirations after the change.

Essay III investigates the characteristics of the limit order book in an index futures market, and examines the intertwined dynamics between trading patience, order flows and liquidity. The results show that, most of the time, the limit order book displays a hump shape. Bid and ask prices tend to move in the same direction. Higher trading patience and higher order arrival rate generates higher liquidity. Moreover, liquidity has a feedback effect on trading patience and order arrival rate. This confirms that some traders may time their arrivals in real time according to market conditions and establish their trading strategies accordingly.

Essay IV is the first to study the Chinese gold market, analyzing hedging strategies utilizing the newly launched Shanghai gold futures. The results show that hedging with gold futures reduces the variance by about 88% in its first two years of existence. Furthermore, the simpler regression hedge outperforms the more complicated bivariate GARCH hedging strategies.

Place, publisher, year, edition, pages
Stockholm: School of Business, Stockholm University, 2013
Keyword
Index options, volatility smile, liquidity, index futures, expiration-day effects, limit order book, trading patience, order flows, gold futures, hedging
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-94665 (URN)978-91-7447-783-2 (ISBN)
Public defence
2013-11-15, Gröjersalen, hus 3, Kräftriket, Roslagsvägen 101, Stockholm, 10:00 (English)
Opponent
Supervisors
Note

At the time of the doctoral defense, the following paper was unpublished and had a status as follows: Paper 3: Accepted.

Available from: 2013-10-24 Created: 2013-10-08 Last updated: 2013-10-16Bibliographically approved

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Citation style
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