Information transfer, microstructures and intraday price return spikes

Article Abstract:

Previous research has identified overnight public information as the cause of higher opening returns and mean reversion in security markets. This paper tests this hypothesis by using an intervention and transfer function time series model to filter out the dynamic effects of an overnight information set on the opening, and subsequent, intraday AOI stock and SPI futures intraday price returns. A further research objective was to analyze the process by which information is transferred into prices and whether there is a differential impact across stock and futures markets. It was determined that the information contained in the overnight US stock market had: (i) a differential impact on the Australian stock and futures market, and (ii) after filtering out the impact of overnight information, a significant reversal tendency remained in both markets after opening. Further analysis supported the conclusion that price spikes at opening were not wholly related to overnight information. Other possible explanations, such as different trading mechanisms, did not provide a satisfactory explanation. Overall, it appears that the uncertainty participants face at the beginning of a trading session may induce a number of subtle market reactions (both rational and irrational), in markets with different microstructures and trading clientele. (Reprinted by permission of the publisher.)

Securities and Commodity Exchanges, Security and commodity exchanges, Securities Exchanges, Analysis, Prices and rates, Stocks, Stock-exchange, Stock exchanges, Exchanges, Economics, Stock prices, Information theory, Futures, Information theory in economics

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Index futures options in Australia - an empirical focus on volatility

Article Abstract:

The futures option contract on the Australian All Ordinaries Share Price Index is a relatively new hybrid security that ought to enhance the richness and potential efficiency of security markets. This paper considers the problems of valuing it using the theoretical price of a futures-style option. It was found that there was little consistency between theoretical prices using a number of historical estimates and observed market prices, either intertemporally or between in-the-money or out-of-the-money calls. Further, implied volatility was found to be a decaying function of time and, except at times of instability, did not predict the ex ante futures volatility as well as historic volatility. (Reprinted by permission of the publisher.)

Australia, Evaluation, Securities, Price indexes

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