Moving Forward Into the Future

Recently, the OMX Stockholm Exchange changed the OMXS 30 index futures contract specifications. Before the change, the futures contract was settled forward style, at maturity only, and was not marked-to-market on a daily basis. Following the contract redesign, the contract is subject to daily settlement as on major index futures exchanges all over the world. The change in contract specifications provides this study with a unique opportunity to investigate the effects of the settlement procedure on liquidity, trading activity, and hedging performance of the futures contract. Results show evidence of increased futures trading volume and unaffected bid-ask spread after the change. No significant difference is found between futures hedging performance before and after the redesign event. However, during a transition period, when contracts with both types of settlement are available, hedging performance is worse relative the periods before the change, and after the change was completely implemented. Moreover, during the transition period, the daily settled contracts show considerably lower hedging errors than the contracts with forward style settlement.

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