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Essays on Derivatives and Liquidity
Stockholm University, Faculty of Social Sciences, School of Business.
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 [en]
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: urn:nbn:se:su:diva-94665ISBN: 978-91-7447-783-2 (print)OAI: oai:DiVA.org:su-94665DiVA: diva2:654873
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
List of papers
1. Option Happiness and Liquidity: Is the Dynamics of the Volatility Smirk Affected by Relative Option Liquidity?
Open this publication in new window or tab >>Option Happiness and Liquidity: Is the Dynamics of the Volatility Smirk Affected by Relative Option Liquidity?
2012 (English)In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 32, no 1, 47-74 p.Article in journal (Refereed) Published
Abstract [en]

This study investigates the dynamic relationship between option happiness (the steepness of the volatility smirk) and relative index option liquidity. We find that, on a daily basis, option happiness is significantly dependent on the relative liquidity between option series with different moneyness. In particular, deterioration (improvement) in liquidity of an out-of-the-money put option relative to a concurrent at-the-money call option would lead to higher (lower) option happiness. This relationship is robust to relative option liquidity measures based on bid-ask spreads, option price impacts, and option order book imbalances. The results also show a significant maturity effect in option happiness, consistent with the notion that options are “dying smiling”.

Keyword
implied volatility, volatility smirk, option happiness, relative option liquidity
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-65322 (URN)10.1002/fut.20507 (DOI)000297171300003 ()
Available from: 2011-12-06 Created: 2011-12-06 Last updated: 2017-12-08Bibliographically approved
2. Expiration-Day Effects of Stock and Index Futures and Options in Sweden: The Return of the Witches
Open this publication in new window or tab >>Expiration-Day Effects of Stock and Index Futures and Options in Sweden: The Return of the Witches
2014 (English)In: Journal of futures markets, ISSN 0270-7314, E-ISSN 1096-9934, Vol. 34, no 9, 868-882 p.Article in journal (Refereed) Published
Abstract [en]

Recently, the NASDAQ-OMX Nordic Exchange announced a change of expiration day for the OMXS 30 index futures and options. The OMXS 30 index derivatives used to expire on the fourth Friday of the expiry month while derivatives on individual stocks expired on the third Friday. After the change, derivatives on both the index and individual stocks expire on the third Friday of the expiry month making the third Friday the “quadruple witching Friday” since stock futures, stock options, index futures and index options expire simultaneously. This contractual change provides a unique opportunity to investigate its impact on expiration-day effects. The results show that there is hardly any expiration-day effect due to the derivatives expirations before or after the contractual change, except the abnormally higher trading volumes at the stock derivatives expirations before the change, and on the quadruple witching Fridays after the change. Most importantly, there is no significantly intensified abnormal volume, volatility or price distortion effect due to the seemingly “extraordinary” change in the OMXS 30 index derivatives, despite the quadruple witching expirations after the change.

Keyword
Expiration-day effects, Index derivatives, Stock derivatives
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-92783 (URN)10.1002/fut.21620 (DOI)000340245600004 ()
Available from: 2013-08-20 Created: 2013-08-20 Last updated: 2017-12-06Bibliographically approved
3. Trading patience, order flows and liquidity in an index futures market
Open this publication in new window or tab >>Trading patience, order flows and liquidity in an index futures market
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
Keyword
Index futures, trading patience, order flows, liquidity
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-94663 (URN)10.1002/fut.21664 (DOI)000339434400002 ()
Available from: 2013-10-08 Created: 2013-10-08 Last updated: 2017-12-06Bibliographically approved
4. Alchemy in the 21st Century: Hedging with Gold Futures
Open this publication in new window or tab >>Alchemy in the 21st Century: Hedging with Gold Futures
2011 (English)In: Review of Futures Markets, ISSN 0898-011X, Vol. 19, no 3, 247-281 p.Article in journal (Refereed) Published
Abstract [en]

Recently, the Shanghai Futures Exchange (SHFE) introduced gold futures trading in China. This paper is the first to study the SHFE gold futures, and to evaluate the futures hedging effectiveness since the introduction. The results show that hedging with gold futures reduces the variance of a hedged gold spot position by about 88% in its first two years of existence. During the second half of 2008, however, when the global financial crisis escalated, the variance reduction dropped to about 70%. Overall, the new Chinese gold futures prove to be attractive and well-needed hedging vehicles for domestic Chinese gold producers, refiners, consumers and investors.

Keyword
Gold futures, China’s gold market, Hedging effectiveness
National Category
Business Administration
Research subject
Business Administration
Identifiers
urn:nbn:se:su:diva-43260 (URN)
Available from: 2010-10-05 Created: 2010-10-05 Last updated: 2017-12-12Bibliographically approved

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