Using High, Low, Open and Closing Prices to Estimate the Effects of Cash Settlement on Futures Prices
Leo H. Chan
Woodbury School of Business, Utah Valley University
Donald D. Lien
University of Texas at San Antonio - College of Business - Department of Economics
Prior to 1986, any opening position on feeder cattle futures contract must be settled with physical delivery after the last trading day. Due to dwindling commercial interests, Chicago Mercantile Exchange (CME) subsequently replaced the system with the cash settlement method. It was argued that cash settlement would help reduces the futures price's volatility. In this paper, we adopted stochastic volatility models to investigate this conjecture. The models allow for time varying volatility. Using 4 estimators based on mixtures of high, low, open and close prices, we found all estimators conclude that the volatility of the feeder cattle futures price decreased after switching from physical delivery to cash settlement. The change in the contract specification therefore enhances price discovery and risk management functions of the futures market. Concerning the higher moments of the volatility, different conclusions were derived. Range data, the Parkinson and the Rogers-Satchell estimators all indicate that cash settlement led to a reduction in the volatility of volatility.
Number of Pages in PDF File: 21
Keywords: Stochastic Volatility Model, Quasi-Maximum Likelihood, Cash Settlement, Feeder Cattle Futures Contract
JEL Classification: G1, Q1, C1working papers series
Date posted: March 23, 2001
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo4 in 0.531 seconds