As the Chinese economy is more and more open to international markets, the country’s derivatives markets are also growing fast to meet the hedging needs of global investors. China recently has launched several commodity and financial options, showing the incentive to vigorously develop its derivatives markets and to strengthen the relationship with the international markets. This special issue gathers papers on Chinese derivatives markets and more broadly, papers from an international perspective. Meanwhile, as Fintech is developing fast in recent years with many applications to derivatives, this issue also includes some Fintech papers on text mining and factor constructions.
The special issue consists of contributions to the 7th International Conference on Futures and Other Derivatives (ICFOD), which was held at Fudan University, Shanghai, in November 2018. All 12 papers have undergone a rigorous peer review. A brief introduction to these articles is as follows:
Bond Flotation with Exotic Commodity Collateral by M. A. H. Dempster conducts the pricing and default risk analysis of an example 350 M EUR 7 year amortized corporate bond issue backed by a nickel wire inventory and subsequent high-tech metal trading as collateral. It includes security price modelling with high-tech metal collateral, the design of risk-free securities with third party derivatives and security pricing and trading methodology.
The Impact of US Macroeconomic News Announcements on Chinese Commodity Futures by Haidong Cai, Shamim Ahmed, Ying Jiang and Xiaoquan Liu provides evidence that the surprise components of a number of US news announcements exhibit a significant effect on returns, trading volume, and volatility of a majority of Chinese futures contracts. Moreover, the authors find an asymmetric effect between positive and negative surprise components.
Identifying the Influential Factors of Commodity Futures Prices through a New Text Mining Approach by Jianping Li, Guowen Li, Xiaoqian Zhu and Yanzheng Yao proposes a new text mining method to identify the influential factors of commodity futures prices. These factors contain almost all the widely studied influential factors, some of which are rarely mentioned in the existing literature.
Index Volatility and the Put-call Ratios: A Tale of Three Markets by Jianhua Gang, Nan Huang, Ke Song and Ruyi Zhang investigates the influence of the put-call-ratio implied by the Shanghai Stock Exchange (SSE) 50 ETF option on the price discovery process of the SSE50 index, both on the spot market and the futures market. The result shows an asymmetric V-shaped relationship between the PCRs and the conditional volatility of the stock index returns as well as the index futures returns.
Hedging Housing Price Risks: Some Empirical Evidence from US by Li Bao, Willian Cheung and Stephan Unger investigates household hedging costs and market liquidity of exchange-traded options on a set of well-developed U.S. home price indexes for homeowners to hedge downside risk of housing prices. The authors find that hedging costs affect household savings from hedging significantly. They propose a new cost-based illiquidity measure for housing derivatives and link it to traditional contract-based liquidity measures in thinly traded derivatives markets.
The Impact of Options Introduction on the Volatility of the Underlying Equity: Evidence from Chinese Stock Markets by Gideon Bruce Arkorful, Haiqiang Chen, Xiaoqun Liu and Chuanhai Zhang examines the impact of the introduction of SSE 50ETF options on the volatility of SSE 50ETF using four different GARCH family models. For all models, the authors find a significant decrease in the underlying equity volatility after options introduction, along with an improvement in the information flow of the underlying equity price.
Volatility Information Difference between CDS, Options, and the Cross Section of Option Returns by Biao Guo, Yukun Shi and Yaofei Xu examines the difference in the information content in credit and options markets by extracting volatilities from corporate credit default swaps (CDSs) and equity options. The authors find that the standardized difference in volatility, quantified as the volatility spread, is positively related to future option returns.
Valuation Model for Chinese Convertible Bonds with Soft Call/Put Provision under Hybrid Willow Tree by Changfu Ma, Wei Xu and George Yuan establishes a new valuation model for Chinese convertible bonds, based on the avvailable Chinese market data, through a hybrid willow tree approach with consideration of the underlying stock price, stochastic interest rate, and credit risk of the issuer. The authors fit their model to the daily market closing prices for 20 Chinese convertible bonds traded from 2007 to 2017 to show the effectiveness of the model.
Chinese Write-Down Bonds: Issuance and Bank Capital Structure by Ping Li, Yingwei Han, Shan Lin and Tongshuai Qiao documents that the issuance of write-down bonds has a positive effect on the issuing bank’s asset allocation, and the effect is relatively greater for lower leveraged banks. The write-down bond issuance is inversely related to capital allocation for banks with high Tier 1 capital ratios.
Price Discovery and Spillover Dynamics in the Chinese Stock Index Futures Market: A Natural Experiment on Trading Volume Restriction by Feng He, Baiao Liu-Chen, Xiantong Meng, Xiong Xiong and Wei Zhang tests the price discovery function and spillover dynamics of the futures market with respect to the change in futures market regulation in September 2015. Shortly after the new regulation, the futures market was more sensitive to new information, but in the long run the price discovery function of the futures market has become much weaker due to a lack of liquidity.
Digital Economy Era: The Role of Telecommunications Sector in Frequency-Dependent Default Risk Connectedness by Shimeng Shi, Pei Liu and Jiayuan Xin utilizes frequency-dependent connectedness measures to study the role played by the telecommunications (telecoms) sector in sectoral default risk connectedness at three frequency bands, i.e., the short-, medium-, and long-term financial cycles. The authors show that investors in the global CDS sector index market have different investment horizons, but they prefer to process default risk information mainly within one week.
Neural Network-based Automatic Factor Construction by Jie Fang, et al. proposes a tailored neural network framework that can automatically construct diversified financial factors based on financial domain knowledge and a variety of neural network structures. The experimental results show that this method can construct informative and diversified factors.