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Stock Volatility and the Levels of the Basis and Open Interest in Future Contracts

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  • Chen, Nai-Fu
  • Cuny, Charles J
  • Haugen, Robert A

Abstract

This article tests a theoretical model of the basis and open interest of stock index futures. The model is based on the differences between stock and futures in terms of investors' ability to customize stock portfolios and liquidity. Empirical evidence confirms the model's prediction that increased volatility decreases the basis and increases open interest. Copyright 1995 by American Finance Association.

Suggested Citation

  • Chen, Nai-Fu & Cuny, Charles J & Haugen, Robert A, 1995. " Stock Volatility and the Levels of the Basis and Open Interest in Future Contracts," Journal of Finance, American Finance Association, vol. 50(1), pages 281-300, March.
  • Handle: RePEc:bla:jfinan:v:50:y:1995:i:1:p:281-300
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    Citations

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    Cited by:

    1. Jian Yang & R. Brian Balyeat & David J. Leatham, 2005. "Futures Trading Activity and Commodity Cash Price Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1‐2), pages 297-323, January.
    2. Ming-Hsien Chen & Vivian Tai, 2014. "The price discovery of day trading activities in futures market," Review of Derivatives Research, Springer, vol. 17(2), pages 217-239, July.
    3. Berglund, T. & Kabir, R., 1995. "What explains the difference between the futures' price and its "fair" value? : evidence from the european options exchange," Discussion Paper 1995-83, Tilburg University, Center for Economic Research.
    4. Berglund, T. & Kabir, M.R., 2003. "What explains the difference between the futures' price and its "fair" value? Evidence from the Euronext Amsterdam," Other publications TiSEM ec81c70e-739d-4b03-be66-2, Tilburg University, School of Economics and Management.
    5. Li, Yingzi & Fortenbery, T. Randall, 2013. "Do Speculators in Futures Markets Make Cash Markets More Volatile?," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151296, Agricultural and Applied Economics Association.
    6. Giorgio Mirone, 2017. "Inference from the futures: ranking the noise cancelling accuracy of realized measures," CREATES Research Papers 2017-24, Department of Economics and Business Economics, Aarhus University.
    7. Chen, Chin-Ho, 2019. "Downside jump risk and the levels of futures-cash basis," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    8. Angelos Kanas, 2008. "Modeling regime transition in stock index futures markets and forecasting implications," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 27(8), pages 649-669.
    9. Hung, Mao-Wei & So, Leh-Chyan, 2009. "New insights into India’s single stock futures markets," MPRA Paper 52491, University Library of Munich, Germany.
    10. Rafiqul Bhuyan, 2002. "Information, Alternative Markets, and Security Price Processes: A Survey of Literature," Finance 0211002, University Library of Munich, Germany.
    11. Zheng, Yao, 2015. "The linkage between aggregate investor sentiment and metal futures returns: A nonlinear approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 58(C), pages 128-142.
    12. John M. Fry & Baoying Lai, 2011. "The interdependence of Coffee spot and futures markets," Working Papers 2011.1, International Network for Economic Research - INFER.
    13. Han, Jianlei & Pan, Zheyao, 2017. "On the relation between liquidity and the futures-cash basis: Evidence from a natural experiment," Journal of Financial Markets, Elsevier, vol. 36(C), pages 115-131.
    14. Óscar Carchano & Julio Lucia & Ángel Pardo, 2017. "A New Perspective on the Relationship between Trading Variables and Volatility in Futures Markets," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 397-407.
    15. Chang, Charles & Lin, Emily, 2015. "Cash-futures basis and the impact of market maturity, informed trading, and expiration effects," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 197-213.

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