The effect of futures trading on the price volatility of gnma securities

✍ Scribed by W. Gary Simpson; Timothy C. Ireland

• Publisher: John Wiley and Sons
• Year: 1982
• Tongue: English
• Weight: 548 KB
• Volume: 2
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990020406

✦ Synopsis

ne of the timeless concerns associated with futures trading is the possibility 0 that destabilizing speculation in futures markets will be transmitted to the cash markets causing distortions in the prices of the underlying commodities. With the tremendous growth of the market for futures contracts on Government National Mortgage Association (GNMA) pass-through certificates, the issue of destabilizing speculation has assumed an increased significance because abnormal volatility in the cash prices of GNMA securities could impair the ability of cash GNMA securities to provide liquidity for the mortgage market. The public policy implications of a decreased flow of credit into the housing market as a result of destabilizing speculation in the futures markets for GNMA securities are substantial.

The purpose of this investigation was to analyze the effect of trading in GNMA futures on the price volatility of GNMA securities in the cash market. The research does not attempt to consider cash price distortions that may result from fraudulent manipulation or congestion resulting from limited deliverable supplies because the present regulatory framework and contract specifications appear to address these problems adequately. The next section of this article reviews the theoretical considerations related to speculation in futures markets and Section I1 considers the previous empirical evidence on speculation in the GNMA security markets. The third section describes the research methodology of the investigation and the fourth section presents the regults of the empirical analysis. The final section develops the implications of the results.