The Office of the Chief Economist produces original research papers on a broad range of topics relevant to the CFTC’s mandate to foster open, transparent, competitive, and financially sound markets in U.S. futures, option on futures, and U.S. swaps markets. In this role, the papers are written, in part, to inform the public on derivatives market issues and can be freely accessed below. They are commonly presented at academic conferences, universities, government agencies, and other research settings. The papers help inform the agency’s policy and regulatory work, and many are published in peer-review journals and other scholarly outlets.
The analyses and conclusions expressed in the papers are those of the authors and do not reflect the views of other members of the Office of Chief Economist, other Commission staff or the Commission itself.
The paper analyzes how manual and automated traders respond to expected news events by taking a detailed look at BLS unemployment announcements.
Automated traders generally reduce activity prior to the announcement, but quickly return to the market, both providing and taking liquidity, once the news has been made public.
Automated traders also generally have shorter holding periods, closing out most positions within minutes of the announcement, and tend to trade in anticipation of short-term price moves.
A tax imposed on U.S. futures transactions in the 1920s and 1930s sharply reduced trading volume but had no apparent effect on market quality, volatility, or open interest.
The tax had the greatest impact on market makers but did not dramatically affect longer-term positioning by other market participants.
In the long-run, exchange members doubled the minimum tick size in order to offset the impact of the tax.
Index dividend swaps are derivatives based on the dividends paid on stocks in an index such as the S&P 500.
We find that swaps between dealers predominate for the S&P 500 (for which dividend futures did not exist); swaps between dealers and clients predominate for European indexes (for which dividend futures do exist).
Dealers are net short dividend exposure; asset managers and hedge funds are long dividend exposure.
Our results are consistent with dealers providing products and services to clients and hedging their risk with another OTC instrument or, if available, a liquid futures market.
NEW TITLE: Derivatives Pricing When Supply and Demand Matter: Evidence from the Term Structure of VIX Futures
Journal of Futures Markets, Volume 39, pp. 1035-1055 https://doi.org/10.1002/fut.22035
Derivatives based on the volatility of certain market prices have become extremely active since 2008, but part of the market is traded via swaps and exhibited little transparency before the advent of regulatory data.
We find that the magnitude of risk transfer conducted via positions in the variance swap market is comparable to the risk transfer conducted via the listed option market – over USD 1 billion in notional vega outstanding in each.
We find that VIX futures are used mostly for near-dated transactions and are actively traded, but swaps are used for longer-dated positioning and trade less frequently.
Asset managers tend to be net long volatility exposure, with dealers and leveraged funds net short volatility.
Raymond P. H. Fishe, Michel A. Robe, Aaron D. Smith
Analyzes the daily positions of 31 foreign Central Banks in U.S. interest rate futures markets between 2003 and 2011.
Documents that Central Bank positions generally account for a small fraction of the overall size of the futures markets
Shows that Central Bank positions before the financial crisis of 2007-2009 are consistent with hedging some underlying balance sheet exposure. During and after the crisis, the pattern suggests an attempt to enhance returns.
Examines whether Central Bank position changes tend to occur simultaneously. Finds differences before and after the onset of the financial crisis: Euro-linked Central Banks become more synchronized, whereas non-European Central Banks show no significant change during the crisis.
This paper develops a model of commodity index trader (CIT) behavior that derives implications for the behavior of futures prices for nearby and deferred contracts.
The paper tests these implications using a unique non-public dataset that allows for precise identification of trader positions.
The results support the model’s predictions. For example, it finds that larger CIT positions lead to a smaller “price” of hedging.
Another key finding is that, consistent with the theoretical model, the spread between prices of nearby and deferred contracts increases with the percentage of CIT holdings in the first deferred contract.
Steve Y. Yang, Qifeng Qiao, Peter A. Beling, William T. Scherer, Andrei A. Kirilenko
This paper uses a Bayesian analysis to study volume and lifecycle patterns of exchange-traded futures contracts during the 20th and early 21st centuries.
The paper finds that the advent of electronic trading at the beginning of the 21st century coincided with a shift in volume and lifecycle patterns.
Prior to the advent of electronic trading, most futures contracts failed (ceased to be listed) for not maintaining sufficient volume levels.
After electronic trading was implemented, far more contracts were listed, but failure rates declined since contracts were more likely to achieve sufficient volume to survive.
Outside of exchanges listing single stock futures, success and failure rates do not appear to vary by listing exchange.
Matthew Baron, Jonathan Brogaard, Andrei A. Kirilenko
