مشخصات استقرار قرارداد و کشف قیمت : شواهد تجربی از بازار معاملات آتی سهم فردی استرالیا

This study applies Geweke [J. Am. Stat. Assoc. 76 (1982) 304] measures of information flow and dependence between Australian individual share futures (ISF) contract and its underlying stock market to investigate whether the price discovery function of futures price has been enhanced after the switch of futures contracts from cash settlement to physical delivery. It is found that the spot market leads the futures market as the futures trading volume is rather small. Further tests suggest that the switch from cash settlement to physical delivery in the ISF contracts has reinforced the information flow from the spot market to the futures market.

Futures contracts are mostly settled by delivery of the underlying asset because the delivery promotes the convergence of cash and futures prices and thus improves hedging performance and informativeness of futures price (Garbade & Silber, 1981). Some, however, are settled in cash due to impractical delivery of the underlying asset such as stock indices. In addition, high delivery cost and vulnerability to market manipulation associated with a physical delivery contract, which may induce price distortions at the expiration, have also advocated an adoption of cash settlement Edwards & Ma, 1996 and Manaster, 1992. The challenge with cash settlement is to make sure that the settlement price properly reflects underlying asset value at the expiration. If this does not occur, the hedging and price discovery functions of futures market are impaired. Cornell (1997) summarizes three types of problems that can cause cash settling futures prices to diverge from true equilibrium prices. Thus, the choice between cash settlement and physical delivery mainly depends on probability of convergence between spot and futures prices at the expiration. This leads some futures contracts, such as feeder cattle and lean hog futures contracts traded in Chicago Mercantile Exchange (CME), to switch from physical delivery to cash settlement and others, such as individual share futures (ISF) in Sydney Futures Exchange (SFE), from cash settlement to physical delivery. Consequently, several studies have examined whether hedging performance in the futures market has been improved or whether informativeness of futures price has been increased after a futures contract is switched from one settlement mechanism to the other. For instance, Lien and Tse (2002) and Rich and Leuthold (1993) examine the effects of cash settlement on the feeder cattle market performance. Both studies provide similar results, which are consistent with the presumptions of CME when initiating the change. Cash settlement reduces the basis variability and enhances the hedging effectiveness. Chan and Lien (2002) study the impact of change in settlement specification on the price discovery function of futures market for both feeder cattle and live/lean hog futures contracts. They find that the feeder cattle futures contract improves its price discovery function after the cash settlement is adopted. But the results for lean hog futures market are not clear cut, probably due to short time span after the contract switches to cash settlement. Little study has been conducted concerning the effect of change in settlement specification on the hedging performance and informativeness of price in Australian ISF market. Australian ISF contracts were settled in cash when they were first traded in 1994. After 2 years, SFE decided to switch from cash settlement to physical delivery. Share futures are different from commodity futures. Commodities are by nature heterogeneous and perishable. The delivery process therefore incurs large transaction costs, including transportation, inspection, storage, and insurance. In addition, physical delivery settlement must specify deliverable grades with premium/discounts and deliverable locations. Therefore, a cash settlement specification for a commodity futures contract is desirable provided an appropriate cash index for settling a contract can be constructed. Instead, a share futures contract has the homogeneous underlying asset. There is no grade heterogeneity problem and delivery cost is small. Physical delivery specification is deemed appropriate and it has advantage of improvement in hedging function. For example, consider an equity call writer who buys the ISF to reduce risk exposure. The physical delivery specification allows them to obtain the stock at the maturity date, whereas cash settlement concludes with cash transferring. Additional risk is incurred when the call writer enters the stock market to purchase the needed stock. On the other hand, physical delivery may promote the market volatility. Cash settlement acts as an unlimited arbitrage. Notwithstanding the concern of excessive speculation, it corrects any market diversions frequently and quickly. Therefore, Australian ISF market is expected to become more effective in providing risk transferring and price discovery functions but more volatile after cash settlement is replaced by physical delivery. The aim of this paper is to examine whether the price discovery function has been improved in Australian ISF market after the contracts switch from cash settlement to physical delivery.1 More specifically, we test the significance of the information flow from share market to share futures market and vice versa and the dependence between two markets before and after the contracts were switched from cash settlement to physical delivery.2 This would provide empirical evidence on whether the switching from cash settlement to physical delivery in Australian share futures market would promote the information flow between two markets or price discovery function of futures market. The study of causal relationships among a set of time series variables has been one of the most important problems in the literature, especially in the field of business and economic investigation. By extending some known results of Granger, 1963 and Granger, 1969 and Sims (1972), Geweke (1982) develops new measures of linear dependence and feedback (information flow) between multiple time series and provides the asymptotic distributions of these measures, which enables to test the significance of feedback between two time series.3 In this paper, we adopt Geweke's (1982) measures to examine the information flow (feedback) and dependence between Australian share market and share futures market before and after the ISF contracts were switched from cash settlement to physical delivery. With the estimation of the cointegrated system equations of spot and futures returns, we find that the lagged spot returns have a significantly positive impact on the current futures returns whereas the lagged futures returns have a significantly negative effect on the current futures returns during both periods of cash settlement and physical delivery. On the other hand, the lagged spot returns or the lagged futures returns have some impact on the current futures returns during cash settlement period and have no impact on the current futures returns during physical delivery period. By formally testing the information flow between spot and futures markets, we find that there is no statistically significant information flow from futures to spot markets, but there exists significant information flow from spot to futures markets during both periods of cash settlement and physical delivery. These findings indicate that the spot market rather than the futures market provides an important price discovery function. This is inconsistent with what we have observed in the stock index and commodity markets. For example, Chan (1992) documented that the stock index futures markets dominates the cash market. Garbade and Silber (1981) termed the spot market as the satellite market. The different findings of the information role and price discovery of a futures market across markets may result from the intensity of trading activity in the spot and futures markets Admati & Pfleiderer, 1988 and Chan, 1992. In Australia, individual stock futures contracts are traded far less frequently than their corresponding stocks. Daily average trading volume ratio of the individual stock to its futures during the sample period varies from 150 to 2000 across each of 10 markets being analyzed. This could result in the spot market playing the leading role of disseminating information and price discovery in the two markets. Moreover, we find that the significant level and magnitude of information flow from spot to futures markets have been increased after the individual share futures contracts were switched from cash settlement to physical delivery. This result suggests that the switch from cash settlement to physical delivery has reinforced the informational role of the Australian stock market. The remainder of this paper is organized as follows. Section 2 introduces Australian ISF market. Section 3 discusses the measures of information flow and dependence between spot and futures markets. The description of data follows in Section 4. Section 5 presents the estimation results. A brief summary concludes the paper in Section 6.

In this study, we apply Geweke’s (1982) measures of information flow and dependence between Australian individual share futures contract and its underlying stock market to investigate the price discovery function of futures price under the different settlement methods, cash settlement and physical delivery. With the estimation of the cointegrated system equations, we find that the lagged spot returns have a significantly positive impact whereas the lagged futures returns have a significantly negative effect on the current futures returns during both periods of cash settlement and physical delivery. On the other hand, the lagged spot returns or the lagged futures returns have some impact on the current futures returns during cash settlement period and have no impact on the current futures returns during the physical delivery period. By formally testing the information flow between spot and futures markets, we find that there is no statistically significant information flow from the futures market to the spot market but there exists significant information flow from the spot market to the futures market during both periods of cash settlement and physical delivery. These findings indicate that the spot market dominates the futures market, and the spot market rather than the futures market provides a price discovery function. This is inconsistent with the relation between spot and futures of the stock index and commodity markets documented in current literature. The inconsistency may be attributed to the relative intensity of trading activity in the two markets. Moreover, we find that the significant level and magnitude of information flow from spot market to futures market are increasing after the switch from cash settlement to physical delivery in the ISF contracts. This result suggests that the switch from cash settlement to physical delivery in the ISF contracts has reinforced the informational role of the spot market.