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The Impact of Futures Trading on the Spot Market for Treasury Bonds
Author(s) -
Hegde Shantaram P.
Publication year - 1994
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1994.tb00405.x
Subject(s) - futures contract , treasury , bond , financial economics , viewpoints , spot contract , economics , spot market , derivatives market , forward market , business , monetary economics , finance , engineering , art , electricity , archaeology , electrical engineering , visual arts , history
Critics of futures markets contend that futures trading destabilizes spot prices and raises price levels of the underlying treasury bonds, while the proponents claim that futures trading improves the information content and stability of spot prices. To investigate these conflicting viewpoints, this paper examines the price behavior of treasury bonds at three critical time points: a) as they enter, retain, and exit the cheapest‐to‐deliver status; b) as they approach the futures delivery date; and, c) as they cease to be deliverable. An empirical analysis based on a rich data set of daily bond prices over thirty‐four delivery quarters reveals little support for the critics’ view of futures trading.