Futures
Market Destabilize the Treasury Bond Cash Market? Gary A. Bortz I. INTRODUCTION
everal market professionals and economists have suggested that financial fu-S tures markets may be contributing to the volatility of interest rates. The most prevalent argument is that futures markets are inherently more volatile than cash markets, presumably because futures market participants are more high levered and speculatively oriented than cash investors. Such volatility may then spill over from futures markets to cash markets as risk arbitrageurs attempt to capitalize on abnormal deviations between implicit forward rates in the cash markets and corresponding future prices (or via other arbitrage techniques).' Indeed, Auerbach (1982), a well-known money market economist, recently asserted that:
The rate volatility caused by the Fed's efforts to tame the money monster is reinforced by the behavior of a new character on the interest-rate scene. He is the futures market trader who relies upon charting techniques to set his investment strategies. He and his brethren have turned the Government securities market into the largest competitor to the Las Vegas gambling casinos. And I think they are contributing to the early retirement of the best, if not all, of the bill and bond traders in the industry. The chartists' minds are not cluttered with facts or the fundamentals relating to monetary policy and the economy. Rather, they are concerned with "heads and shoulders", "channels", "triangles", "gaps", "neck lines", "double bottoms", "island reversals", "pennant formations", "Elliot Waves", and "Fibonnocci Series." Don't ask me to explain their techniques. Unfortunately, I do not have their occult powers. In any event, through the arbitrageurs, they have an enormous impact on the cash markets.
If futures markets do, in fact, increase the volatility of cash prices, this would call into question the social value of financial futures instruments and their recent pro-'The specific issue of abnormal futures price behavior during delivery periods will not be addressed.