Forthcoming articles


International Journal of Financial Markets and Derivatives


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International Journal of Financial Markets and Derivatives (6 papers in press)


Regular Issues


  • CDS spreads in the aftermath of central clearing   Order a copy of this article
    by Orcun Kaya 
    Abstract: In an attempt to understand the impact of derivative market reforms, this paper focuses on the spreads of centrally cleared CDSs using a unique data set of voluntarily cleared non-financial single-name contracts over the period from January 2009 to June 2013. Controlling for a number of factors that previous studies identified as important determinants of credit risk, my results indicate that CDS spreads widen with the initiation of central clearing. I document that even though dealer risk is priced in CDS spreads and an increase in dealer risk narrows spreads, the initiation of central clearing does not necessarily change the pricing of counterparty risk for CDSs written on non-financial firms. On the contrary, I provide evidence that CDS volatility and central clearing widen CDS spreads jointly. Because the margin requirements of CCPs depend heavily on CDS spread variations observed in the past, observed widening in spreads is potentially caused by the collateral costs related to central clearing.
    Keywords: Central clearing; Cost of trading; Counterparty risk; Credit default swaps.

  • A portfolio optimisation model for credit risky bonds with Markov model credit rating dynamics   Order a copy of this article
    by Arti Singh, Selvamuthu Dharmaraja 
    Abstract: In this paper a credit risk optimisation model for the portfolio of credit risky bonds with l-infinity-norm risk measure is proposed. The proposed model is formulated as a linear programming problem which makes it computationally efficient for the portfolio of large size. The rate of returns of the bonds are the input parameters of the proposed model and of the other portfolio optimisation models which are considered for the comparison with the former. The complete approach of generating rate of returns of the bonds, given their initial credit ratings and transition probability matrices, is presented. The time homogeneous discrete time Markov chain model is assumed for the credit rating dynamics of bonds. With extensive numerical illustrations the proposed approach of obtaining rate of returns of the bonds is demonstrated. Furthermore, comparison of the proposed credit risk optimisation model with other inline existing portfolio optimization models is performed.
    Keywords: Credit risk; Credit rating; Discrete time Markov chain; Portfolio optimisation; l-infinity-norm; Efficient frontier; Mean absolute deviation.

  • The Impact of Market Participants Interaction on Futures Prices: Comparing three U.S. Wheat Futures Markets   Order a copy of this article
    by David Bosch 
    Abstract: The extreme price movements in the three U.S. wheat futures markets in 2008 and 2011 can be largely explained by fundamental developments. But different price reactions in those three wheat futures markets raise doubt whether only supply and demand moved wheat futures prices. The question arises whether the different behaviour of market participants is also essential for price discovery. This study examines the influence of different market structures on prices of the three most important U.S. wheat futures markets. For this purpose traders positions of the Disaggregated Commitments of Traders (DCOT) Report from June 2006 to December 2013 are analyzed. Results reveal that during the price peak, the behaviour of hedgers and other market participants at the Minneapolis Grain Exchange contributed to the decoupling of wheat futures prices from the fundamental development. This demonstrates that market structure is of great importance for price development in futures markets.
    Keywords: Agricultural commodity markets; wheat; United States; supply; demand; speculation; hedging; CBOT; KCBT; MGEX; Disaggregated Commitments of Traders; market structure; futures markets.

  • Information Processing in Freight and Freight Forward Markets: An Event Study on OPEC Announcements   Order a copy of this article
    by Philipp Lauenstein, Andre Kuster Simic 
    Abstract: In this paper, information processing in spot and forward freight markets with respect to the Organization of the Petroleum Exporting Countries (OPEC) output announcements is investigated. We use the event study methodology to study returns in tanker freight spot and forward markets around OPEC conferences from 2003 to 2014. Significant abnormal returns indicate that the output decisions are informationally important for the pricing of crude oil transportation services. We consistently find patterns of positive abnormal returns around production increase announcements and negative abnormal returns around announcements of production cuts. Our analysis also suggests that market participants appear to trade three to five days prior to the final announcement based on their anticipation of the actual output announcements. This is consistent with findings from related studies on crude oil returns. Persistence of abnormal returns in the post-event period indicates incomplete initial reactions or at least slow adjustment to disseminated information.
    Keywords: Tanker Freight Rates; Freight Forwards; OPEC; Informational Efficiency; Event Study.

  • Improvements in Forecasting of Bank Stock Excess Returns Using the Investor Sentiment Endurance Index: A Comparison with CAPM and Fama-French Models   Order a copy of this article
    by Ling He, K. Michael Casey 
    Abstract: In order to raise the forecasting quality for banking equity costs, this study uses the sentiment endurance (SE) index developed by He (2012) and applies this model to the banking industry. The SE index is used as the risk factor to replace commonly used risk factors, the overall market risk premium, and the Fama-French factors small minus big (SMB), and high minus low (HML). The sentiment endurance index in this study measures changes in the lasting momentum of bank stock prices and can therefore be used to predict future changes in bank stock prices. The results of this study indicate that the monthly rolling out-of-sample forecasts generated by the sentiment endurance model, in general, are significantly more accurate than the CAPM and Fama-French models. When the overall market risk premium or SMB and HML are added into the sentiment endurance index model, respectively, the quality of forecasting based on short rolling periods actually deteriorates and improvements in forecasting quality based on longer rolling periods are trivial. The empirical results indicate there is little additional information contained in the three risk factors when compared to the sentiment endurance index.
    Keywords: investor sentiment endurance index; rolling forecasting.

  • Do simple traders rules perform better than the GARCH model? Evidence from currency options in India   Order a copy of this article
    by Aparna Bhat 
    Abstract: The moneyness and maturity biases empirically observed in the case of the Black-Scholes-Merton (BSM) model have led to the evolution of alternative option-pricing models that attempt to address the shortcomings of the BSM model. One such alternative model is the GARCH model of Duan (1995) which takes into account the heteroscedastic nature of volatility. This paper examines the pricing performance of Duans GARCH model in the context of exchange-traded currency options traded in India. The comparison is made with the sticky-strike and sticky-delta models used by practitioners. These models recognize implied volatility as a function of the options strike price and time to maturity and are easier to implement than the GARCH model which is computationally intensive. The study finds that the practitioners models fare better than the more sophisticated GARCH model in pricing currency options in an emerging market like India.The contribution of this paper lies in the fact that it is one of the few studies that focuses on the empirical performance of the GARCH model in pricing currency options and the only study in the context of currency options in India.
    Keywords: Currency options; GARCH option-pricing model; sticky-strike; sticky-delta; dollar-rupee options.