Cash Settlement and Futures Price Volatility: Evidence from Options Data

Forthcoming in Advances in Quantitative Analysis of Finance & Accounting

Posted: 1 Aug 2002

See all articles by Leo H. Chan

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

Abstract

The Chicago Mercantile Exchange (CME) abandoned the live hog futures contract (physical delivery) in December 1996 and replaced it with the lean hog futures contract (cash settlement), with the intention of improving the effectiveness of the contract as a risk management tool. This paper applies implied volatility derived from options on live/lean hog futures contracts to examine the possible effects of cash settlement on futures price volatility. Using different data windows and applying different model specifications, it is found that the hog futures price has become less volatile, thus improving the risk management function of the futures contract, since the adoption of cash settlement.

Note: This is a description of the paper and not the actual abstract.

Keywords: Cash Settlement, Implied Volatility, Live/Lean Hog Futures Options, GARCH Models

JEL Classification: G1, Q1, C1

Suggested Citation

Chan, Leo H. and Lien, Donald, Cash Settlement and Futures Price Volatility: Evidence from Options Data. Forthcoming in Advances in Quantitative Analysis of Finance & Accounting. Available at SSRN: https://ssrn.com/abstract=320806

Leo H. Chan (Contact Author)

Woodbury School of Business, Utah Valley University ( email )

Department of Finance and Economics
800 West University Parkway
Orem, UT 84058
United States
801-863-8428 (Phone)

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

Register to save articles to
your library

Register

Paper statistics

Abstract Views
822
PlumX Metrics