Forthcoming and Online First Articles

International Journal of Financial Markets and Derivatives

International Journal of Financial Markets and Derivatives (IJFMD)

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International Journal of Financial Markets and Derivatives (5 papers in press)

Regular Issues

  • Finite Difference Solutions of the CEV PDE   Order a copy of this article
    by Nawdha Thakoor 
    Abstract: This work studies the valuation of European options under the constant elasticity of variance model. The model generalises the Black-Scholes framework for option pricing by incorporating a local instantaneous volatility term which is a function of the stock price. The model has the ability to fit certain implied volatility structures exhibited by market option prices, but the computation of the closed-form European option formula is not always stable and can be largely inaccurate for some parameter ranges because of the difficulties associated with the computation of the non-central chi-square distribution in the valuation formula. As an alternative to one line of research which aims at accelerating and stabilising the analytical price computation, we study finite difference techniques to obtain European option prices and associated hedging parameters. It is numerically demonstrated that a direct discretisation of the pricing equation in combination with an exponential integrator in time performs better than other schemes based on Crank-Nicolson discretisations of two transformed problems, one posed on an infinite domain and the other on a finite domain.
    Keywords: option pricing; constant elasticity of variance; CEV; European options; finite difference scheme; exponential time differencing.
    DOI: 10.1504/IJFMD.2023.10050793
  • The Commitment of Traders (CoT) Report as a Trading Signal? Short-Term Price Reversals and Market Efficiency in the US-Futures Market   Order a copy of this article
    by Simon Dreesmann, Tim A. Herberger, Michel Charifzadeh 
    Abstract: The Commitment of Traders report (CoT) has been around for over 30 years, consistently revealing the futures positions of key market players. This study’s primary aim is to use the comprehensive data from the Commitment of Traders reports to develop a short-term reversal trading strategy. Against the benchmark, a S&P 500 buy-and-hold approach with a Sharpe ratio of 1.07, the CoT long only strategy generated significant results in six individual markets. Extending the strategy to long-and-short, two markets outperformed the benchmark significantly. However, a scenario analysis indicated underperformance of the CoT strategy when traded in a portfolio, confirming that the chosen strategy parameters could not generate excess Sharpe ratios. Our results indicate that the Commodity Futures Trading Commission, more specifically the CoT report, contributed to efficient derivatives market.
    Keywords: futures short-term reversal trading strategy; Commitment of Traders report; portfolio optimisation; Monte Carlo simulation; efficient derivatives market.
    DOI: 10.1504/IJFMD.2023.10053051
  • Dynamic Correlations of Bond and Equity Futures and Macroeconomic Determinants: International Evidence   Order a copy of this article
    by Nikiforos Laopodis, Theophano Patra, Vassilis Thomas 
    Abstract: This paper examines whether the dynamic co-movements between stock-bond futures markets may be driven by domestic and international macroeconomic factors. The empirical analysis also investigates whether economic uncertainty and geopolitical risks have an impact on the dynamic conditional correlations of bond and equity futures markets. The results pointed to significance of domestic inflation and industrial production, while the 3M USD Libor and 3M Euribor surfaced as determinants of the dynamic equity-bond futures correlations. Finally, the paper examines the impact of the pandemic on the dynamic correlations with the split of the sample in pre- and post-pandemic periods and it was found that neither the uncertainty nor the geopolitical risk indices emerged as statistically significant in any country.
    Keywords: bond-equity futures; DCC-GARCH; macroeconomic variables; economic uncertainty indices; geopolitical risk.
    DOI: 10.1504/IJFMD.2023.10053553
  • The Effect of Bank Diversification on the Capital, Risk, Profitability and Efficiency of the Eurozone and the United States Banks in the aftermath of the Global Financial Crisis.   Order a copy of this article
    by Dimitra Loukia Kolia, Simeon Papadopoulos 
    Abstract: This paper investigates the influence of bank diversification on bank capital, risk, profitability and efficiency in a dynamic panel estimator. We also examine: 1) how the influence differs depending on the type of diversification (asset, income, non-interest income diversification); 2) whether diversification affects the eurozone banks differently than the US banks; 3) which banking type (commercial, cooperative and savings banks) is more benefited from diversification. Our findings indicate that income diversification has substantial benefits when compared to other types of diversification. Whereas non-interest income diversification has the most unfavourable results for the reported groups. Additionally, the impact of asset diversification is mixed for the dependent variables and it is contingent on whether a bank belongs to eurozone or to the USA. Finally, our survey highlights how different bank types (commercial, cooperative or savings banks) are influenced by bank diversification.
    Keywords: bank; capital; risk; efficiency; profitability; data envelopment analysis; adjusted Herfindahl-Hirschman indices; system-GMM.
    DOI: 10.1504/IJFMD.2023.10053628
  • The Relative Efficiency of Investment Grade Credit and Equity Markets   Order a copy of this article
    by William Procasky 
    Abstract: I examine the relative efficiency of investment-grade CDS and equity markets using a set of liquidly tradable indices for both markets. Prior research has focused on manually constructed indices created from matched portfolios for the equity market. While this results in a matching of constituents, it only produces a theoretical trading instrument. Moreover, that research has only examined the 5-year CDS maturity whereas I also examine the 10-year, which better matches the indefinite life of a stock. Finally, I investigate the potential for size bias. I observe that the longer-dated CDS maturity and an equally-weighted equity index in which large capitalisation bias is removed are informationally inefficient, with the equity market having a relative advantage. While no such advantage is observed in the other indices, overall results indicate liquidly traded indices are not as efficient as manually constructed matched portfolios and arbitrage profits may be possible using specifically paired indices.
    Keywords: credit derivatives; market efficiency; price discovery; lead-lag relationship; credit markets; CDS indices.
    DOI: 10.1504/IJFMD.2023.10053701