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FIA Releases Futures Volatility Study

FIA Releases Futures Volatility Study

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Published by: MarketsWiki on Aug 28, 2013
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FIA Releases Futures Volatility Study-- Study Examines Impact of Structural Changes over Time
-- Study Finds Limited Impact on Intraday Price Volatility
-- Study Based on Price Data for 15 Futures ContractsWashington, D.C.—Aug. 27, 2013—The Futures Industry Association today released anempirical study on changes in the level of volatility in the futures markets. The studyfocused on 15 futures contracts listed on four leading futures exchanges—CME Group,Eurex, IntercontinentalExchange and NYSE Liffe.The study found that prices in these 15 markets moved through cycles of high and lowvolatility as well as numerous price spikes attributable to macro-economic events. Thestudy found, however, that volatility attributable to structural factors did not change inmost of these contracts. In other words, innovations such as algorithmic and high-frequency trading do not appear to have affected the volatility of prices.“The pace of innovation in the futures markets has been nothing short of remarkable.Where 10 or 15 years ago, most trading took place in the pits, today the lion’s share isexecuted electronically at speeds that would not have been imagined in days of old. Yetour research has shown that intraday volatility has not been affected by these changes.Trading is certainly faster than it used to be, but there is no evidence this has causedvolatility to increase,” said Robert E. Whaley, Valere Blair Potter Professor of Management (Finance) and Director of the Financial Markets Research Center atVanderbilt University’s Owen Graduate School of Management.The study was conducted by Whaley and Nicolas P.B. Bollen, the E. Bronson IngramResearch Professor in Finance at Vanderbilt University’s Owen Graduate School of Management. The study was facilitated by FIA and sponsored by the four exchanges inorder to better understand the impact of structural change on market quality.“The futures markets have evolved dramatically over the last decade or so, and somepeople have expressed the view that these changes have caused market quality todeteriorate,” said Walt Lukken, president and chief executive officer of FIA. “We decidedthat the best way to address this concern would be to analyze the empirical data to seeif there have been any structural impacts on volatility. Thanks to the work of academicexperts, we now have empirical evidence that volatility in the futures markets hasneither increased nor decreased once the effects of macro-economic shocks areremoved. We thank the exchanges for their support for this research and we hope thisstudy will contribute to public understanding of market structure and market quality inthe futures markets.”
Futures Industry Association
2001 Pennsylvania Ave. NW +1 202.466.5460Suite 600 +1 202.296.3184 faxWashington, DC 20006-1823 www.futuresindustry.org
The study identifies two benchmarks for intraday volatility that can be used to assessthe impact of micro-structural changes on intraday volatility while controlling for changesin the rate of information flow. The first is the use of implied volatility in equity indexoptions markets and comparing that to realized volatility. The second involvedcomputing return volatility over different holding periods and measuring changes in therelative magnitude of volatility.In both cases, the analysis found that the volatility measured by these benchmarks didnot change through time for most of the 15 contracts that were examined. Theexception was the four contracts listed on Eurex, but the increase in volatility occurredonly in 2011—the last year of the sample period—and is likely due to the liquidityproblems caused by the Euro crisis rather than changes in market structure.The 15 futures contracts covered by the study consist of three short-term interest ratecontracts, four long-term interest rate contracts, five equity index contracts, two crude oilcontracts, and one sugar contract. The 15 contracts were:CME GroupEurodollar FuturesE-mini S&P 500 Index FuturesLight Sweet (WTI) Crude Oil Futures10-Year U.S. Treasury FuturesEurexDax FuturesEuro-Stoxx 50 Index FuturesEuro-Bund FuturesEuro-Bobl FuturesIntercontinentalExchangeBrent Crude FuturesRussell 2000 Index FuturesSugar #11 FuturesNYSE LiffeFTSE 100 Index FuturesThree Month Euribor FuturesThree Month Short Sterling FuturesLong Gilt FuturesThe full text of the study is available on the FIA website here. 

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