Liquidity and volatility in 90 day bank accepted bills futures in crisis year 2008

Abstract

The literature on derivative securities evidently does not contain any empirical studies of liquidity and volatility with high frequency data for leading Australian financial futures contracts, during the general financial crisis. In addressing this deficiency, this paper studies the impact of liquidity events on the cost of liquidity, and estimates the liquidity-volatility relationship for Australian 90 Day Bank Accepted Bills futures, with round-the-clock data for the crisis year 2008. In this paper volatility is represented by realized volatility, which removes the latent variable characteristic from volatility. While the extant literature has studied the liquidity interdependence between spot markets for bonds and equities, the liquidity interdependence between the futures markets for these securities has received little attention, and none at all for Australian futures markets during the crisis. This paper addresses that shortcoming, and studies the effect with intraday data of changes in the cost of liquidity for S&P200 futures on the liquidity of 90 Day Bank Accepted Bills futures in 2008