The value of the early unwind option in futures contracts with an endogenous basis

In this paper the implicit early unwind option of a risk neutral arbitrageur is valued. The problem is analyzed in a market microstructure framework where four different groups of market participants interact. Within this model the equilibrium price relationship between stock and futures markets is determined. Since the underlying of the option is influenced by arbitrage trading the underlying of the option depends contrary to standard option pricing theory on the unwind option itself. The non-Markovian stochastic process of the basis is characterized and the results of an extensive comparative static analysis of the option value are presented. --

Market depth and order size: an analysis of permanent price effects of DAX futures' trades

In this paper we empirically analyze the permanent price impact of trades by investigating the relation between unexpected net order flow and price changes. We use intraday data on German index futures. Our analysis based on a neural network model suggests that the assumption of a linear impact of orders on prices (which is often used in theoretical papers) is highly questionable. Therefore, empirical studies, comparing the depth of different markets, should be based on the whole price impact function instead of a simple ratio. To allow the market depth to depend on trade volume could open promising avenues for further theoretical research. This could lead to quite different trading strategies as in traditional models. --

DAX Index Futures: Mispricing and Arbitrage in German Markets

The paper reports the results of an empirical study of the price relation between the German Performance Stock Index, DAX, and DAX futures. An ex-ante arbitrage strategy based on arbitrage signals is analyzed. The data set contains intraday bid- and ask futures quotes and index values on a minute by minute basis. It is found that the number and persistence of arbitrage opportunities differs considerably for futures nearest to deliver as compared to futures which are not nearest to deliver. The findings suggest that arbitrageurs trade mainly in futures nearest to deliver. The risk associated with arbitrage trading is found to be very small so that arbitrage profits are nearly risk free. --

Family Matters: The Performance Flow Relationship in the Mutual Fund Industry

The relationship between the performance of mutual funds and their subsequent growth is examined. The focus of our paper is on the influence of the position of a fund within its family. So far only the influence of the position of a fund within its segment on its subsequent inflows has been considered. Our empirical study of the US mutual fund market shows that fund growth depends on the relative position of a fund within its segment AND within its family. This leads to important incentives for fund managers.Mutual Funds, Fund Families, Performance Flow Relationship, Intra-Firm Competition

Fundamental information in technical trading strategies

Technical trading strategies assume that past changes in prices help predict future changes. This makes sense if the past price trend reflects fundamental information that has not yet been fully incorporated in the current price. However, if the past price trend only reflects temporary pricing pressures, the technical trading strategy is doomed to fail. We demonstrate that this failure can be avoided by using financial statements as additional sources of information. We implement a trading strategy that invests in stocks with high past returns and high operating cash flows. This combination strategy yields a 3-factor alpha of 15% per year, which is much higher than that of the pure momentum strategy that invests in stocks with high past returns without considering operating cash flows. The combination strategy outperforms the momentum strategy in almost all years. The outperformance can be traced back to a higher probability of picking outperforming stocks. These are stocks that yield high future cash flows and hardly ever delist due to poor performance. The combination strategy is easily implemented: the information used is publicly available, the stocks chosen are liquid, and even high transaction costs do not erode the outperformance. --

The term structure of illiquidity premia

This paper investigates the dynamics of the term structure of bond market illiquidity premia using data on German bond market segments which differ only with respect to their liquidity. We analyze the interaction between different parts of the term structure and identify economic factors that drive the illiquidity premia. We obtain three main results: (i) The term structure of illiquidity premia is U-shaped on average but its shape varies over time. (ii) There is a strict separation between the short end and the long end of the term structure of illiquidity premia, i.e. we find no evidence for spill-over effects across different maturities. Different economic factors drive different parts of the term structure. The short end is mainly driven by asset market volatilities which suggests a fight-to-liquidity effect. In contrast, the long end depends on long-term business cycle economic prospects. This suggests that different parts of the term structure are determined by different investor clienteles with different liquidity needs. (iii) There is a smooth transition from short-term to long-term illiquidity premia. The longer the time to maturity of a bond, the less important market volatilities are and the more important long-term economic prospects become. --bond liquidity,term structure of illiquidity premia

The impact of duality on managerial decisions and performance: Evidence from the mutual fund industry

We study the decisions and performance of managers who are also chair of the board (duality managers). We hypothesize that duality managers take more risky decisions and deliver worse performance than non-duality managers due to reduced level of control and replacement risk. Using the mutual fund industry as our laboratory we provide strong support for these hypotheses: Duality managers take risk that they could easily avoid, deviate from their benchmarks, make extreme decisions, and, consequently, deliver extreme performance outcomes. Furthermore, their average underperformance is 2.5 percent. All effects are the stronger, the more power the manager has in the board

Market Depth and Order Size - An Analysis of Permanent Price Effects of DAX Futures' Trades

In this paper we empirically analyze the permanent price impact of trades by investigating the relation between unexpected net order flow and price changes. We use intraday data on German index futures. Our analysis based on a neural network model suggests that the assumption of a linear impact of orders on prices (which is often used in theoretical papers) is highly questionable. Therefore, empirical studies, comparing the depth of different markets, should be based on the whole price impact function instead of a simple ratio. To allow the market depth to depend on trade volume could open promising avenues for further theoretical research. This could lead to quite different trading strategies as in traditional models

The value of the early unwind option in futures contracts with an endogenous basis

In this paper the implicit early unwind option of a risk neutral arbitrageur is valued. The problem is analyzed in a market microstructure framework where four different groups of market participants interact. Within this model the equilibrium price relationship between stock and futures markets is determined. Since the underlying of the option is influenced by arbitrage trading the underlying of the option depends contrary to standard option pricing theory on the unwind option itself. The non-Markovian stochastic process of the basis is characterized and the results of an extensive comparative static analysis of the option value are presented