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The effect of net positions by type of trader on volatility in foreign currency futures markets

The effect of net positions by type of trader on volatility in foreign currency futures markets We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co‐vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:427–450, 2002 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Futures Markets Wiley

The effect of net positions by type of trader on volatility in foreign currency futures markets

The Journal of Futures Markets , Volume 22 (5) – May 1, 2002

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References (36)

Publisher
Wiley
Copyright
Copyright © 2002 Wiley Periodicals, Inc.
ISSN
0270-7314
eISSN
1096-9934
DOI
10.1002/fut.10021
Publisher site
See Article on Publisher Site

Abstract

We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co‐vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:427–450, 2002

Journal

The Journal of Futures MarketsWiley

Published: May 1, 2002

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