IDEAS home Printed from https://ideas.repec.org/p/boe/boeewp/57.html
   My bibliography  Save this paper

Why do the LIFFE and DTB bund futures contracts trade at different prices?

Author

Listed:
  • Francis Breedon

Abstract

The German Bund futures contract is the most important bond futures contract in Europe. It is also unusual in that it trades on competing Exchanges - LIFFE in London and the DTB in Frankfurt. This paper looks at a surprising aspect of this dually traded contract, namely that the contract trades slightly more expensively (1.5 basis points) in LIFFE than in the DTB. LIFFE argue that this price difference helps make their contract more attractive. The paper investigates three possible explanations for the price difference. First, the calculation of price factors (conversion factors that make bonds in the basket of deliverables more comparable) differs slightly between Exchanges. Second, the DTB contract carries on trading for one day longer than the LIFFE one giving the short one more days to choose which bund in the basket to deliver (the so-called quality option) and so makes the contract slightly less valuable to the trader with a long position. Third, the penalty for late delivery is harsher on LIFFE than on the DTB and so investors fearing a short squeeze (where investors that are supposed to deliver the underlying bunds cannot acquire them) will be more nervous of holding a LIFFE contract than a DTB one. It concludes that none of these factors are important enough to explain the observed price difference and so it is hard to explain why the price difference occurs.

Suggested Citation

  • Francis Breedon, 1996. "Why do the LIFFE and DTB bund futures contracts trade at different prices?," Bank of England working papers 57, Bank of England.
  • Handle: RePEc:boe:boeewp:57
    as

    Download full text from publisher

    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1996/wp57.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Breedon, F J & Fisher, P G, 1996. "M0: Causes and Consequences," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(4), pages 371-387, December.
    2. Eijffinger, S.C.W., 1997. "Optimal commitment in an open economy : Credibility vs. flexibility," Other publications TiSEM f87d017a-7727-44bb-bf7a-5, Tilburg University, School of Economics and Management.
    3. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    4. Eijffinger, S.C.W. & Schaling, E., 1995. "Optimal commitment in an open economy : Credibility vs. flexibility," Discussion Paper 1995-79, Tilburg University, Center for Economic Research.
    5. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    6. Roger Beaton & Paul Fisher, 1995. "The Construction of RPIY," Bank of England working papers 28, Bank of England.
    7. Bayoumi, Tamim, 1993. "Financial Deregulation and Household Saving," Economic Journal, Royal Economic Society, vol. 103(421), pages 1432-1443, November.
    8. Joanna Paisley, 1994. "A Model of Building Society Interest Rate Setting," Bank of England working papers 22, Bank of England.
    9. Spencer Dale & Marco Rossi, 1996. "A Market for Intra-day Funds: Does it Have Implications for Monetary Policy?," Bank of England working papers 46, Bank of England.
    10. David Barr & Bahram Pesaran, 1995. "An assessment of the relative importance of real interest rates, inflation and term premia in determining the prices of real and nominal UK bonds," Bank of England working papers 32, Bank of England.
    11. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
    12. Mike Joyce, 1995. "Modelling UK Inflation Uncertainty: The Impact of News and the Relationship with Inflation," Bank of England working papers 30, Bank of England.
    13. Mark Deacon & Andrew Derry, 1994. "Deriving Estimates of Inflation Expectations from the Prices of UK Government Bonds," Bank of England working papers 23, Bank of England.
    14. Nicola Anderson & Francis Breedon, 1996. "UK Asset Price Volatility Over the Last 50 Years," Bank of England working papers 51, Bank of England.
    15. Jo Corkish & David Miles, 1994. "Inflation, inflation risks and asset returns," Bank of England working papers 27, Bank of England.
    16. Chris Melliss & Mark Cornelius, 1994. "New currencies in the Former Soviet Union: a recipe for hyperinflation or the path to price stability," Bank of England working papers 26, Bank of England.
    17. Sterne, Gabriel & Bayoumi, Tamim, 1995. "Temporary Cycles or Volatile Trends? Economic Fluctuations in 21 OECD Economies," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(1), pages 23-51, March.
    18. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Jo Corkish & Allison Holland & Anne Fremault Vila, 1997. "The Determinants of Successful Financial Innovation: an Empirical Analysis of Futures Innovation on LIFFE," Bank of England working papers 70, Bank of England.
    2. Cantillon, Estelle & Yin, Pai-Ling, 2008. "Competition between Exchanges: Lessons from the Battle of the Bund," CEPR Discussion Papers 6923, C.E.P.R. Discussion Papers.
    3. Francis Breedon & Allison Holland, 1998. "Electronic versus open outcry markets: The case of the Bund futures contract," Bank of England working papers 76, Bank of England.
    4. John Board & Charles Sutcliffe & Stephen Wells, 2002. "Transparency and Fragmentation," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-4039-0707-3, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Charles Nolan & Eric Schaling, 1996. "Monetary Policy Uncertainty and Central Bank Accountability," Bank of England working papers 54, Bank of England.
    2. Matthew B Canzoneri & Charles Nolan & Anthony Yates, 1996. "Feasible Mechanisms for Achieving Monetary Stability: a Comparison of Inflation Targeting and the ERM," Bank of England working papers 52, Bank of England.
    3. Clive Briault & Andrew Haldane & Mervyn A. King, 1997. "Independence and Accountability," Palgrave Macmillan Books, in: Iwao Kuroda (ed.), Towards More Effective Monetary Policy, chapter 10, pages 299-340, Palgrave Macmillan.
    4. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    5. Marco Bianchi & Gylfi Zoega, 1998. "Unemployment persistence: does the size of the shock matter?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(3), pages 283-304.
    6. Francis Breedon & Ian Twinn, 1995. "Valuation of underwriting agreements for UK rights issues: evidence from the traded option market," Bank of England working papers 39, Bank of England.
    7. Marco Bianchi, 1996. "A Comparison of Methods for Seasonal Adjustment of the Monetary Aggregates," Bank of England working papers 44, Bank of England.
    8. Nicola Anderson & Francis Breedon, 1996. "UK Asset Price Volatility Over the Last 50 Years," Bank of England working papers 51, Bank of England.
    9. Marco Bianchi, 1995. "Testing for convergence: evidence from non-parametric multimodality tests," Bank of England working papers 36, Bank of England.
    10. Quah, Danny & Vahey, Shaun P, 1995. "Measuring Core Inflation?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1130-1144, September.
    11. Spencer Dale & Marco Rossi, 1996. "A Market for Intra-day Funds: Does it Have Implications for Monetary Policy?," Bank of England working papers 46, Bank of England.
    12. Anthony Yates & Bryan Chapple, 1996. "What Determines the Short-run Output-Inflation Trade-off?," Bank of England working papers 53, Bank of England.
    13. Andy Haldane & Bennett McCallum & Chris Salmon, 1996. "Base Money Rules in the UK," Bank of England working papers 45, Bank of England.
    14. Marco Rossi, 1996. "The information content of the short end of the term structure of interest rates," Bank of England working papers 55, Bank of England.
    15. Mark S Astley & Andrew G Haldane, 1995. "Money as an Indicator," Bank of England working papers 35, Bank of England.
    16. Prasanna Gai, 1996. "International Bank Lending to LDCs - an Information-Based Approach," Bank of England working papers 43, Bank of England.
    17. Joanna Paisley & Chris Salmon, 1995. "How Cyclical is the PSBR?," Bank of England working papers 34, Bank of England.
    18. David Barr & Bahram Pesaran, 1995. "An assessment of the relative importance of real interest rates, inflation and term premia in determining the prices of real and nominal UK bonds," Bank of England working papers 32, Bank of England.
    19. Marco Bianchi, 1995. "Granger causality tests in the presence of structural changes," Bank of England working papers 33, Bank of England.
    20. Andrew G Haldane, 1995. "Rules, Discretion and the United Kingdom's New Monetary Framework," Bank of England working papers 40, Bank of England.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:57. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Digital Media Team (email available below). General contact details of provider: https://edirc.repec.org/data/boegvuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.