School of Banking & Finance Working Papers Working Paper Series 2000-07 Australian Overnight Futures Trading: Efficiently Determined by Us Prices?

Overnight futures trading is available in the US, France and Australia. This study investigates the efficiency of Australian overnight futures prices and shows how overnight trading offers new opportunities for short-term risk management. We find that the overnight futures traders are very much focussed on simultaneous US daytime trading with US returns and Australian overnight returns having a correlation of 83%. The overnight prices seem to overreact to the US market since subsequent early morning futures prices move in the opposite direction from the overnight return. The overnight prices can be used to compute 24-hour returns for the US and Australia over exactly the same time interval. These synchronous returns can then be used to compute correlation measures. Daily data leads to large samples, hence smaller standard errors, and more flexibility when modeling dynamic correlations. They are also a vital input for short-term risk management, including daily Value-at-Risk. a School of Banking and Finance, University of New South Wales, Sydney NSW 2052, Australia. Email: [email protected]; Fax: 9385 6347; Tel: 9385 5864