Estimating Actual Bid-Ask Spreads in Commodity Futures Markets

Various bid-ask spread estimators are applied to transaction data from LIFFE cocoa and coffee futures markets, and the resulting estimates are compared to observed actual bid-ask spreads. Results suggest that actual bid-ask spreads, which are not reported by most open-outcry futures markets, can be reasonably estimated using readily available transaction data. This is especially important since recent research seems to indicate that efforts to estimate effective spreads using data commonly available from futures markets have not been successful. Thus estimates of actual spreads can give market participants and researchers some idea of potential transaction costs. Accurate estimates of bid-ask spreads will also be needed to assess the relative efficiency of electronic versus open-outcry trading. Results indicate that estimators using averages of absolute price changes perform significantly better at estimating actual bid-ask spreads in futures markets than estimators using the covariance of successive price changes.Marketing,

VOLATILITY SPILLOVERS BETWEEN FOREIGN EXCHANGE, COMMODITY AND FREIGHT FUTURES PRICES: IMPLICATIONS FOR HEDGING STRATEGIES

In many studies the assumption is made that traders only encounter one type of price risk. In reality, however, traders are exposed to multiple price risks, and often have several relevant derivative instruments available with which to hedge price uncertainty. In this study, commodity, foreign exchange, and freight futures contracts are analyzed for their effectiveness in reducing price uncertainty for international grain traders. A theoretical model is developed for a representative European importer to depict a realistic trading problem encountered by an international grain trading corporation exposed to more than one type of price risk. The traditional method of estimating hedge ratios by Ordinary Least Squares (OLS) is compared to the Seemingly Unrelated Regression (SUR) and the multivariate GARCH (MGARCH) methodology, which takes into account time-varying variances and covariances between the cash and futures markets. Explicit modeling of the time-variation in futures hedge ratios via the MGARCH methodology, using all derivatives and taking into account dependencies between markets results in a significant reduction in price risk for grain traders. The results also confirm that the unique, but underutilized, freight futures market is a potentially useful mechanism for reducing price uncertainty for international grain traders. The research undertaken in this study provides valuable information about reducing price uncertainty for international grain traders and gives a better understanding of the linkages between closely related markets.hedging, multivariate GARCH, foreign exchange, freight and commodity futures, Financial Economics, International Relations/Trade,

PRICE AND PRICE RISK DYNAMICS IN BARGE AND OCEAN FREIGHT MARKETS AND THE EFFECTS ON COMMODITY TRADING

The effects of volatility of barge and ocean freight prices on prices throughout the international grain-marketing channel are analyzed using a Multivariate GARCH-M model. The model is used to infer the extent to which transportation price risk affects the level of international grain prices. Results indicate that both barge and ocean price volatility influence grain prices, but barge price volatility tends to have a greater impact on grain prices than that arising from ocean price volatility. The lack of a futures contract for barge rates may be partially responsible for its significant influence on grain price levels.Barge and ocean freight prices, futures contracts, Multivariate GARCH-Models, Price volatility, International Relations/Trade,

COMPARING THE PERFORMANCES OF THE PARTIAL EQUILIBRIUM AND TIME-SERIES APPROACHES TO HEDGING

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using a simple derivative with a linear payoff function (a futures contract). For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform the time series model. The partial equilibrium models unpalatable assumptions of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are employed.Marketing,

VOLATILITY SPILLOVERS BETWEEN FOREIGN EXCHANGE, COMMODITY AND FREIGHT FUTURES PRICES: IMPLICATIONS FOR HEDGING STRATEGIES

In many studies the assumption is made that traders only encounter one type of price risk. In reality, however, traders are exposed to multiple price risks, and often have several relevant derivative instruments available with which to hedge price uncertainty. In this study, commodity, foreign exchange, and freight futures contracts are analyzed for their effectiveness in reducing price uncertainty for international grain traders. A theoretical model is developed for a representative European importer to depict a realistic trading problem encountered by an international grain trading corporation exposed to more than one type of price risk. The traditional method of estimating hedge ratios by Ordinary Least Squares (OLS) is compared to the Seemingly Unrelated Regression (SUR) and the multivariate GARCH (MGARCH) methodology, which takes into account time-varying variances and covariances between the cash and futures markets. Explicit modeling of the time-variation in futures hedge ratios via the MGARCH methodology, using all derivatives and taking into account dependencies between markets results in a significant reduction in price risk for grain traders. The results also confirm that the unique, but underutilized, freight futures market is a potentially useful mechanism for reducing price uncertainty for international grain traders. The research undertaken in this study provides valuable information about reducing price uncertainty for international grain traders and gives a better understanding of the linkages between closely related markets.hedging, multivariate GARCH, foreign exchange, freight and commodity futures, Marketing, F3, C3, G1,

Information Cascades: Evidence from An Experiment with Financial Market Professionals

Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments with student subjects. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. As a baseline, we compare their behavior to student choices in similar treatments. We further examine whether, and to what extent, cascade formation is influenced by both private signal strength and the quality of previous public signals, as well as decision heuristics that differ from Bayesian rationality. Analysis of over 1,500 individual decisions suggests that CBOT professionals are better able to discern the quality of public signals than their student counterparts. This leads to much different cascade formation. Further, while the behavior of students is consistent with the notion that losses loom larger than gains, market professionals are unaffected by the domain of earnings. These results are important in both a positive and normative sense.

Investment under Uncertainty: Testing the Options Model with Professional Traders

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the “bad news principle”: the downside investment state influences the investment decision whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, which is drawn from student and professional trader subject pools, is broadly consonant with the options model.

Heightened Epstein-Barr virus immunity and potential cross-reactivities in multiple sclerosis

Background: Epstein-Barr virus (EBV) is a likely prerequisite for multiple sclerosis (MS) but the underlying mechanisms are unknown. We investigated antibody and T cell responses to EBV in persons with MS (pwMS), healthy EBV-seropositive controls (HC) and post-infectious mononucleosis (POST-IM) individuals up to 6 months after disease resolution. The ability of EBV-specific T cell responses to target antigens from the central nervous system (CNS) was also investigated.Methods: Untreated persons with relapsing-remitting MS, POST-IM individuals and HC were, as far as possible, matched for gender, age and HLA-DRB1*15:01. EBV load was determined by qPCR, and IgG responses to key EBV antigens were determined by ELISA, immunofluorescence and Western blot, and tetanus toxoid antibody responses by multiplex bead array. EBV-specific T cell responses were determined ex vivo by intracellular cytokine staining (ICS) and cross-reactivity of in vitro-expanded responses probed against 9 novel Modified Vaccinia Ankara (MVA) viruses expressing candidate CNS autoantigens. Results: EBV load in peripheral blood mononuclear cells (PBMC) was unchanged in pwMS compared to HC. Serologically, while tetanus toxoid responses were unchanged between groups, IgG responses to EBNA1 and virus capsid antigen (VCA) were significantly elevated (EBNA1 p = 0.0079, VCA p = 0.0298) but, importantly, IgG responses to EBNA2 and the EBNA3 family antigens were also more frequently detected in pwMS (EBNA2 p = 0.042 and EBNA3 p = 0.005). In ex vivo assays, T cell responses to autologous EBV-transformed B cells and to EBNA1 were largely unchanged numerically, but significantly increased IL-2 production was observed in response to certain stimuli in pwMS. EBV-specific polyclonal T cell lines from both MS and HC showed high levels of autoantigen recognition by ICS, and several neuronal proteins emerged as common targets including MOG, MBP, PLP and MOBP. Discussion: Elevated serum EBV-specific antibody responses in the MS group were found to extend beyond EBNA1, suggesting a larger dysregulation of EBV-specific antibody responses than previously recognised. Differences in T cell responses to EBV were more difficult to discern, however stimulating EBV-expanded polyclonal T cell lines with 9 candidate CNS autoantigens revealed a high level of autoreactivity and indicate a far-reaching ability of the virus-induced T cell compartment to damage the CNS