Futures Trading and Volatility in the Government National Mortgage Association (GNMA) Market

摘要

This paper analyzes the impact of futures trading in Government National Mortgage Association (GNMA) pass - through certificates on price volatility in the cash market for these securities. The successful GNMA futures market has extended the possibility of hedging interest rate risks on an important class of securities to a much wider group of investors. However, the real benefits from the futures market accrue mainly to the new participants who are not already active in the cash market, such as smaller regional mortgage lenders. While futures trading brings new speculative capital into this market, it can also increase price volatility. To explore this question, the paper constructs a model of daily volatility in GNMA prices that incorporates volatility in related markets, breadth and liquidity of the cash GNMA market, the level of GNMA prices, and futures market activity. Cash market volatility was calculated using daily data on the prices for GNMA 8 - and 9 - percent coupon issues from January and February 1975, respectively, through February 1979. This analysis demonstrated that increased liquidity and lower average prices tended to stabilize the market, while futures market activity increased the volatility of prices. The study found no evidence of insufficient speculative activities in futures relative to hedging and ruled out any likelihood of price manipulation. Instead, it concluded that futures prices are determined largely by the actions of new classes of traders who were likely to have less good information than the GNMA dealers who set prices in the cash market. Tables, footnotes, and references are included. (Author abstract modified).