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This analysis examines the phenomenon of a globe-spanning lattice of financial derivatives. Derivatives have instrumentalised risk in such a way as to promote financialised accumulation, which abstracts from any linear relationship to underlying processes of real wealth creation.

Over the last few decades, a large number of new equity derivatives have emerged in the international financial system. Examples of these innovations include equity options, stock index futures, and more recently, futures on individual stocks. Whether the creation of these new derivative instruments has social or economic value is of central concern for both policy-makers and scholars. Advocates argue that the new derivative instruments make markets more complete, enhance information dissemination, and allow a more optimal allocation of risk in the economy. However, there are many who argue that derivatives have a negative impact on financial markets, by allowing more investors to take highly leveraged speculative positions. A considerable amount of research has been directed towards examining the impact and performance of different commodity and financial derivatives markets. However, as a recent entrant to the global derivatives market, the evidence on Universal Stock Futures (USFs) market is very limited. This thesis, therefore, aims to provide new evidence in the literature by examining the role and functioning of USF contracts. Given their unique characteristics, the investigation of USFs provides more reliable and wider ranging insights into the economic benefits and costs of futures market. The empirical results can be summarised as follows. First, the introduction of USFs has not had a detrimental effect on the underlying markets. On the contrary, the influence appears to have been positive leading to a small reduction in noise trading and improved efficiency. Second, USFs perform the price discovery function efficiently since futures prices contribute to the discovery of new information. Furthermore, many USF contracts influence the volatility of the relevant stock, and therefore, further support the notion of price discovery. Third, the market also seems to perform its risk management function satisfactorily, although some contracts fail to reduce the price risk to the extent evidenced in other markets in the literature. Finally, sub-period/sub-sample analysis indicates that the effectiveness of USF contract as a centre for price discovery and risk management has strengthened over the years; and are influenced by market-specific factors (liquidity and trading costs), futures characteristics like contract size, and geographical origin of underlying stock. The overall finding of this thesis is that USF markets are well-functioning and do not undermine the existing markets. These results should provide useful reference for other emerging markets which have introduced and/or been considering to launch single stock futures to their markets.

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This thesis looks at the statistical interaction of credit ratings and Credit Default Swap (CDS) spreads. Both have been implicated as major contributors to the financial crises of 2007-present. The body of work contained herein looks to further our understanding of their relationship and in doing so, I make three empirical contributions to the fields of credit risk and financial economics. Firstly, in Chapter 2, I uncover a striking empirical artifact contained within CDS correlation dynamics. Namely, that there is a well-defined credit rating structure embedded in them. Although much of the extant literature treats credit derivatives and equity as contingent claims on the same underlying firm value, by contrast, no rating-based structure exists in equity correlations. In Chapter 3, I demonstrate that rating-based correlation dynamics in CDS markets are not fully consistent with the traditional framework of financial economics in which a security’s price merely reflects its fundamental value. I show that the trading behaviour of market participants in relation to CDS indices, the constituents of which are based on the discrete and somewhat arbitrary labeling of issuers as either investment-grade or high-yield, drives a distortion in single-name CDS co-movement. My results can be interpreted as the first evidence of a significant departure from traditional views of market efficiency in a $30 trillion segment of global derivatives markets. Finally, in Chapter 4, I go on to explore the complete time-series and cross-sectional interaction of the credit rating process on CDS spreads. In doing so, I identify that prior to the crisis, credit rating agencies played a much greater role in the price discovery process of corporate credit risk. As such, there has been a significant loss of information in credit ratings. This result can be explained via a loss of confidence in rating agencies due to a spill-over effect of reputational damage from their role in the collapse of the $3tn structured credit derivatives market. The use of ex post hyper-inflated AAA ratings on CDOs and RMBS, and the subsequent fall-out from doing so, has altered how credit market participants react to the information contained in corporate credit ratings. These results are particularly relevant in light of impending regulatory reform under the Dodd-Frank act of 2010.

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