Modelling Efficiency in the Futures Market

Modelling Efficiency in the Futures Market

• Industry Assistant Professor of Management Science Seung Youn Cha

Abstract:

This paper examines and models market efficiency dynamics in several futures markets, at a higher frequency. After developing a coherent efficiency testing system that integrates several previous frameworks, we find that all tested futures contracts exhibit significant time variation in efficiency, consistent with the Adaptive Markets Hypothesis. Furthermore, we find that this occurs both with respect to linear inefficiency (serial correlations in return) and in non-linear efficiency (dependency in higher-order moments of return).

We document that this variation is explainable, in substantial part, by draws in liquidity and high-frequency trading activity. Furthermore, we find evidence that HFT is beneficial in mitigating inefficiency in the markets. We also document the interesting pattern in liquidity draws: all futures have significant roll variation liquidity in their first back contract, but vary greatly in pattern in the spot contract depending on the market’s role as a primary pricing source.

This is the first paper to study these ideas and should be of great interest to both institutional traders and academic researchers.

All Illinois Tech faculty, students, and staff are invited to attend.

The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Stuart alumni, Illinois Tech colleagues, business professionals, and faculty from other leading business schools.