MAY 1981 GNMA PASSTHROUGH SECURITIES Futures Trading and Volatility in the GNMA Market STEPHEN FIGLEWSKI* FUTURES MARKETS FOR AGRICULTURAL commodities have existed for well over 100 years. Recently there has been a major expansion of futures trading into nontraditional areas, particularly interest-bearing securities and foreign currenciesthe so-called âfinancial futures.â The introduction of exchange traded futures contracts for Treasury Bills, GNMA pass-through certificates, and other securities has created new hedging, arbitrage, and speculative opportunities for the investors, issuers, and dealers who are active in the cash markets for these securities. Futures trading has also opened these markets to participation by new classes of traders, particularly private and smaller institutional investors. Through the process of arbitrage, a financial futures market will be closely linked to the cash market for the underlying securities. An important concern of the regulatory authorities is what effect opening a futures market is likely to have on an existing cash market. The purpose of this paper is to analyze the impact of futures trading in Government National Mortgage Association (GNMA) passthrough certificates on price volatility in the cash market for these securities. There are several major ways in which opening futures trading can increase efficiency and
The Journal of Finance – Wiley
Published: May 1, 1981
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