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International market segmentation, and the CME Quanto Nikkei Future

Andrew Carverhill; Ron Schramm

Title:
International market segmentation, and the CME Quanto Nikkei Future
Author(s):
Carverhill, Andrew
Schramm, Ron
Date:
Type:
Reports
Department(s):
Center on Japanese Economy and Business
Persistent URL:
Series:
Center on Japanese Economy and Business Working Papers
Part Number:
194
Geographic Area:
Japan
Publisher:
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Publisher Location:
New York
Abstract:
The CME Nikkei 225 "Quanto" futures contract settles against the Nikkei Index but taken to refer to US dollars. In contrast, the corresponding "Vanilla" instruments trading in Singapore and Osaka, settle in Yen. We show that the returns to the Quanto future are correlated with returns to the US market, as represented by the CME S&P500 future, even after controlling for the returns to the Vanilla contract, translated into dollars, and the dollar/Yen returns. This correlation is partially reversed the next day. This result goes against the usual analysis of Quanto instruments, which asserts that they can be hedged via the corresponding vanilla instrument, and a currency position. In fact, we show that our Quanto and Vanilla investment strategies should not differ in their currency exposure, and this is reflected in the significance of the dollar/Yen return not being high or consistent from year to year in our regressions. Our results point to the international market being segmented; users of the CME Quanto Nikkei future are influenced too much by the US Market factor.
Subject(s):
Economics
Commerce
Item views
885
Metadata:
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Suggested Citation:
Andrew Carverhill, Ron Schramm, , International market segmentation, and the CME Quanto Nikkei Future, Columbia University Academic Commons, .

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