ABSTRACTThe shape of the pricing kernel has important implications for expected option returns. We shed light on the pricing kernel puzzle (i.e., mixed results regarding the shape of the pricing kernel) by examining S&P 500 index option returns and empirical pricing kernels across a wide range of expiration dates (from 1 month to 1 year). We document that at short (long) maturities, out‐of‐the‐money call option returns are negative (positive) and decrease (increase) with the strike price. At short maturities, empirical pricing kernels predominantly exhibit a W‐shape, while this pattern becomes less pronounced, evolving toward a monotonically decreasing curve at longer maturities. Our study suggests that the shape of pricing kernels and call option returns varies with option maturities, reflecting investors' heterogeneous beliefs about index returns across different time horizons.

ABSTRACT Using a text‐based measure of peer opinions constructed from cryptocurrency‐related social media posts, we find that peer opinions contain valuable information about the prices of cryptocurrency options. Bitcoin options exhibit a volatility smile, which becomes steeper when peer opinions become bearish. The risk‐neutral skewness of Bitcoin returns implied by options prices becomes more negative in times of bearish opinions. The predictability of peer opinions for Bitcoin option prices remains robust after controlling for momentum, volatility, demand pressures, news effects, and other sentiment measures, and exhibits no evidence of reversal over time. This effect is pronounced when Bitcoin attracts high investor attention, more diverse opinions about Bitcoin are expressed on social media, and Bitcoin options are more actively traded. We find similar results for Ethereum options.

ABSTRACTClimate change, water mismanagement, and overconsumption are intensifying droughts and water shortages worldwide. Beyond health risks, water scarcity threatens food security, disrupts agriculture, and can fuel conflicts—underscoring the need for sustainable water management. This paper proposes a financial strategy using weather derivatives tied to water indexes or variables like rainfall to hedge against volumetric risks. Through a case study of California's water market, and a sensitivity analysis based on climate change scenarios, we show how these tools can mitigate the impact of water scarcity, particularly in agriculture, and help bridge the climate risk insurance gap.

ABSTRACTWe propose and implement a trading strategy based on the index‐tracking approach to build portfolios that hedge climate risk using commodity futures. We consider the climate change news index of Engle et al. to derive the hedge target. The empirical results suggest that the index‐tracking approach performs well in constructing climate change hedge portfolios. The short‐selling constraint enhances the out‐of‐sample hedge performance due to the alleviation of overfitting. The hedge performance indicates that commodity futures could be effective tools for hedging climate risk. We further reveal the heterogeneous roles of commodity futures in hedging climate risk. Our work provides an effective strategy for constructing climate change hedge portfolios and highlights the important and potential role of commodity futures in the era of climate change.

ABSTRACTThis study attempts to investigate the economic motivation of high‐frequency traders (HFTs) to use single‐stock futures (SSFs) contracts. Using a novel intraday data set from the largest exchange of SSFs, with identifiers for algorithmic traders, we attempt to disentangle the hedging and information‐based trading motivations of HFTs in using this market. We find that hedging is the primary motivation for HFTs to use the futures market. We also find that the regulatory change of upward revision of the minimum contract size in the derivative market made it more difficult for the HFTs to use the futures to hedge their spot market exposure effectively.

ABSTRACTThis paper analyzes the possibility of speculative traders influencing the prices of commodity futures in the presence of liquidity constraints. We identify phases of price explosiveness following Phillips, Shi, and Yu and use a series of multinomial logistic models to analyze the influence of speculators on the probability of these explosive price episodes. We find that speculators taking short positions tend to increase the likelihood of negative price explosiveness in most commodities, while those with long positions often reduce the chance of positive price explosions. We also find that the probability of negative price explosiveness is more sensitive to the net short positions held by money managers when both market and funding liquidity are constrained.

ABSTRACTThis study examines the impact of implementing an intraday continuous auction method in Taiwan's spot market on price discovery in the single‐stock futures (SSFs) market. The findings highlight the advantages of aligning the trading method of the underlying spot market with that of the SSF market, leading to improved price discovery in SSFs. A difference‐in‐differences analysis validates our findings. In addition, key factors such as spread, liquidity, and information intensity significantly influence cross‐sectional variation in price discovery. Notably, leverage—a fundamental feature of futures contracts—has a strong and positive effect on SSF price discovery following this alignment of trading methods.

ABSTRACTExporting companies encounter various sources of price uncertainty and can choose between hedging each risk separately or jointly. This study analyzes the differences between these strategies in terms of their performance. For practical analysis, we assume a representative exporter in the US that ships soybeans to Europe and faces input price risk (domestic soybean price) and output price risk (Euro/US dollar exchange rate). Our study reveals that joint hedging typically enhances hedging effectiveness (HE) the most, although the benefits may be limited in specific circumstances. We also find that the baseline level of risk stemming from the soybean price movement plays a crucial role in determining the performance of the hedging strategy. Higher market risks, such as a high soybean price and increased price volatility, contribute to better HE. Conversely, when the initial risk is low, such as in cases of depreciated domestic currency value, significant improvement in HE is less likely. Joint hedging allows simultaneous response to multiple risks, but single‐commodity hedging is faster in responding to individual price risks, especially when this risk originates from the commodity that is being hedged. However, if a firm opts for single hedging and faces a price risk from an unhedged source, a significant loss in HE occurs compared with joint hedging. The study also confirms that price dependence affects HE, with higher dependence between spot and futures prices resulting in more effective hedging. In cases of high dependence between the two commodities' prices, joint hedging performs relatively better than single‐commodity hedging due to the presence of offsetting risks. Our findings suggest that the choice between joint and single hedging should be tailored to the specific risk exposures faced by firms in the soybean and foreign exchange (FX) markets. This decision should take into account factors, such as shock means, shock volatilities, and dependencies between commodity and FX rates.

ABSTRACTThis paper investigates the interplay between speculative and price volatility in the energy futures markets over various cycles, utilizing wavelet coherence and a double‐layer network approach. Contrary to conventional wisdom, we find that long‐term price volatility in individual futures markets, driven by extreme events, persistently leads to increased speculative trading, partly associated with increased hedging and risk management activity. The connectedness of the two‐layer network system is dominated by speculation and volatility spillovers in the short and long term, respectively. The cross‐layer spillover effects between price volatility and speculation are more pronounced in the long term. The direct and network effects of speculation reinterpret the interaction patterns among various futures markets. Specifically, the crude oil market, as a net receiver of spillover effects, exhibits an impact of speculation on price volatility driven primarily by network effects. However, the natural gas market is dominated by the direct effects of speculation.