Dynamics of the Australian interest rate futures market

Abstract

This thesis forms a comprehensive empirical study of the dynamics of the Australian interest rate futures market, focusing on market efficiency and trading activity in the period encapsulating the release of macroeconomic announcements. High-frequency data for the period January 2004-December 2010 is utilised. The first study in this thesis focuses on the price adjustment process around major scheduled macroeconomic announcements. Following Ederington and Lee (1993) eight announcements are identified as major; they have a statistically significant impact on market volatility. The Australian interest rate futures market is efficient in the sense that there is no information leakage and prices react swiftly to macroeconomic news, with the response complete within 30secs. Coincident with the price reaction there is a sharp increase in volatility and market activity. Results are driven by the news component of macroeconomic announcements. The second study considers the impact of RBA target rate news and accompanying monetary policy statements. A novel method is employed to explicitly determine market expectations. Interest rate futures react to the news component of monetary policy announcements, the response is asymmetric, and the news impact declines as the tenor of the security increases. RBA news is disaggregated into a target-factor and a path-factor; monetary policy statements drive the path-factor while modification to monetary policy communication have improved the ability of the RBA to influence market expectations. The third empirical study considers price discovery following RBA policy announcements in the special case of interbank futures. A 3-stage process is identified whereby low volume and wider spreads are common prior to the announcement, rapid price changes and large increases in trading volume meet the announcement, and volume subsides as spreads revert to normal following the announcement. While the events of 2007 have impacted the price discovery process, it is market uncertainty that plays a greater role in determining market activity. The final study examines the relationship between trading activity and market returns. Order imbalance is identified as a powerful determinant of price action, with contemporaneous order imbalance exerting a significant impact on market returns; excess buy (sell) orders drive prices up (down) and yields down (up).