Essays on futures trading and price volatility.
Item
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Title
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Essays on futures trading and price volatility.
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Identifier
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AAI9325115
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identifier
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9325115
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Creator
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Kocagil, Ahmet Enis.
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Contributor
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Adviser: Ronald W. Anderson
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Date
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1993
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance | Economics, General | Economics, Commerce-Business
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Abstract
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One of the economic tasks of futures markets is reallocation of (spot price) risk from agents who do not wish to take them to others who are willing to do so. Consequently, if, a model which is based on rational optimizing agents and simultaneous determination of spot and futures prices arrives at a conclusion which suggests that, say, futures speculation increases spot price volatility, then, not only the mainstream Pareto improvement claim becomes ambiguous, but even the existence of futures markets can be thought to be defeating their purpose. Some regulators, professional investors and academicians voiced a similar opinion blaming computerized futures trading for the crash in 1987. The mainstream financial theory, on the other hand, supports the contrary position, namely, that futures trading decreases spot price volatility due to reductions of the price-stability disturbing effects due to demand shocks. Even though, financial theory supports a view which is being debated by a significant amount of professional traders and academicians, so far there has been no satisfactory empirical academic study aiming at resolving this controversy. Hence, the first of the two essays in this study addresses to this problem.;Empirical observations about volatility-adjusted futures price movements exhibit significant differences in their average magnitudes depending on the type of commodity they are written on. The answer provided to the question of why we observe industry-specific differences among the traded futures contracts by the traders as well as by academicians is that they are different in nature. Despite the fact that this answer is correct in essence, one realizes that financial theory is still lacking a comprehensive and consistent theoretical model with the help of which those differences can be explained. Hence in order to provide a theoretical framework for the observed differences and their causes a simple model is developed in the second essay and then its conclusions are tested with empirical data.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
