Using High, Low, Open and Closing Prices to Estimate the Effects of Cash Settlement on Futures Prices
21 Pages Posted: 23 Mar 2001
There are 2 versions of this paper
Using High, Low, Open and Closing Prices to Estimate the Effects of Cash Settlement on Futures Prices
Date Written: January 2001
Abstract
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.
Keywords: Stochastic Volatility Model, Quasi-Maximum Likelihood, Cash Settlement, Feeder Cattle Futures Contract
JEL Classification: G1, Q1, C1
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Modeling and Forecasting Realized Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
Modeling and Forecasting Realized Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
The Distribution of Realized Exchange Rate Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
The Distribution of Exchange Rate Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
The Distribution of Exchange Rate Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
The Distribution of Stock Return Volatility
By Torben G. Andersen, Tim Bollerslev, ...
-
By Torben G. Andersen, Tim Bollerslev, ...
-
Range-Based Estimation of Stochastic Volatility Models
By Sassan Alizadeh, Michael W. Brandt, ...
-
By Torben G. Andersen, Tim Bollerslev, ...
-
By Torben G. Andersen, Tim Bollerslev, ...