Job Market Paper
The Informational Role of Trading Volume in Thinly Traded Options Markets with B. Goodwin-- Under Review
Presented early work at 2023 NC-1177 Meetings, KREI-KAAEA Meeting, and 2024 AAEA Annual Meeting in New Orleans, LA
Abstract: Options markets are generally very thinly traded, with a significant percentage of contracts having zero trading volume across different strikes and maturities. When trading volume is zero, the Chicago Mercantile Exchange (CME) manually settles the option prices. This study evaluates the accuracy of option prices settled with zero volume and examines its implications for the Black-Scholes (BS) option pricing model. Our empirical analysis focuses on selected agricultural commodities, using end-of-day options chain data from 2005 to 2022. The results indicate that when trades occur after one or more days of zero volume (i.e., when the market receives initial information from actual trades), the price moves substantially. This suggests that options settled with zero volume may not effectively reflect the market's sentiment and expectations regarding future prices. Therefore, the informational content—and thus the validity—of prices settled with zero volume can be questioned. We also observe that higher implied volatilities are often found for options far into or out of the money, which contradicts the distributional assumptions of the BS model. Notably, such violations are mostly observed for options with zero trading volume. Our findings demonstrate that limited trading volume may have significant implications for the validity of the BS model.
Working Papers
Nonlinear Aspects of Integration in Corn Markets with B. Goodwin-- Accepted, J. of Agricultural and Resource Economics
Presented early work at 2022 AAEA Annual Meeting in Anaheim, CA
Abstract: We examine spatial integration in US corn markets using a nonlinear generalized additive model that incorporates lagged oil prices and price differentials. Six regional markets are compared to a central market using over 30 years of monthly data. All markets show strong linkages to the central market, with significant nonlinearities in most cases. The results highlight the crucial role of fuel prices in spatial linkages for markets along the Mississippi River. Rising fuel prices inhibit trade, with more pronounced effects downstream. Conversely, oil prices have less impact on markets located closer to the central market and farther from the river.
Convergence Bias in Lean Hog Futures with B. Goodwin-- R&R, J. of Agricultural and Applied Economics
Presented early work at 2024 AAEA Annual Meeting in New Orleans, LA
Abstract: This study evaluates the convergence of hog futures and cash prices over the past five decades, focusing on the impact of settlement changes and the thinning of cash hog markets. We find a significant convergence bias under physical delivery, with futures prices differing from spot prices by 30-35% at expiration. With the transition to cash settlement, convergence has greatly improved. Interestingly, while the basis exhibits reasonable values within 30 days of expiration, it is notably high beyond that period. We also find that, as the share of negotiated volume decreases, the absolute basis tends to increase, indicating a lack of convergence. Our findings highlight the diminishing but still significant role of cash hog markets in price discovery and identify concerning features in futures markets.
Works in Progress
The Impact of Wildfire Smoke on Crop Yields with R. Rejesus
Scheduled to present at 2025 SAEA Annual Meeting in Irving, TX
Testing and Identification of Common Trends and Factors in Agricultural Prices with J. Kim, B. Goodwin, and D. Kim