Measuring the Impacts of Cash Settlement
Author | : Leo H. Chan |
Publisher | : |
Total Pages | : 25 |
Release | : 2001 |
ISBN-10 | : OCLC:1290403348 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Measuring the Impacts of Cash Settlement written by Leo H. Chan and published by . This book was released on 2001 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 improve the convergence between cash and futures prices and reduce the basis variability. In this paper, we adopted stochastic volatility models to investigate this conjecture. The models allow for time varying volatility. We found strong evidence of reduction in basis and in basis variance after cash settlement. Moreover, cash settlement induced a change in the structural relationship between cash and futures prices. The futures market has become more efficient after the change in settlement methods.