Title

Physical Delivery Versus Cash Settlement: An Empirical Study on the Feeder Cattle Contract

Publication Type

Journal Article

Publication Date

2002

Abstract

This paper investigates the effects of the switch from physical delivery to cash settlement on the behavior of the cash and futures prices of the feeder cattle contract traded on the Chicago Mercantile Exchange. A bivariate Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is applied to estimate the conditional volatility structure, with a possible structural break due to the switch to cash settlement. The results show that the volatility of the futures prices (but not the cash prices) declined after physical delivery was replaced by cash settlement. In terms of futures hedging, cash settlement led to smaller and more stable hedge ratios. The variance of the hedged portfolio also decreased substantially. The evidence suggests that cash settlement is beneficial to the feeder cattle futures market.

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Empirical Finance

Volume

9

Issue

4

First Page

361

Last Page

371

ISSN

0927-5398

Identifier

10.1016/s0927-5398(01)00060-3

Publisher

Elsevier

Additional URL

http://dx.doi.org/10.1016/s0927-5398(01)00060-3

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