Volatility, trading volume and open interest in futures markets

Volatility, trading volume and open interest in futures markets PurposeThe purpose of this paper is to examine the effect of trading volume and open interest on volatility of futures markets. The authors capture the size and change in speculative behaviour in futures markets by examining the role of liquidity variables (trading volume and open interest) in the behaviour of futures prices.Design/methodology/approachThe sample includes daily data covering the period 1996-2014 from 36 international futures markets (including currencies, commodities, stock indices, interest rates and bonds). The authors employ a two-stage estimation methodology: first, the authors employ a E-GARCH model and consider the asymmetric response of volatility to shocks of different sign. Further, the authors consider a regression framework to examine the contemporaneous relationships between volatility, trading volume and open interest. To quantify the percentage of volatility that is caused by liquidity variables, the authors also regress the estimated volatilities on the measures of open interest and trading volume.FindingsThe authors find that: market depth has an effect on the volatility of futures markets but the direction of this effect depends on the type of contract, and there is evidence of a positive contemporaneous relationship between trading volume and futures volatility for all futures contracts. Impulse-response functions also show that trading volume has a more relevant role in explaining market volatility than open interest.Practical implicationsThese results are recommended to financial managers and analysts dealing with futures markets.Originality/valueTo the best of the authors’ knowledge, no study has yet considered a complete database of futures markets to investigate the empirical relation between price changes (volatility), trading volume and open interest in futures markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png international Journal of Managerial Finance Emerald Publishing

Volatility, trading volume and open interest in futures markets

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1743-9132
DOI
10.1108/IJMF-04-2015-0071
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to examine the effect of trading volume and open interest on volatility of futures markets. The authors capture the size and change in speculative behaviour in futures markets by examining the role of liquidity variables (trading volume and open interest) in the behaviour of futures prices.Design/methodology/approachThe sample includes daily data covering the period 1996-2014 from 36 international futures markets (including currencies, commodities, stock indices, interest rates and bonds). The authors employ a two-stage estimation methodology: first, the authors employ a E-GARCH model and consider the asymmetric response of volatility to shocks of different sign. Further, the authors consider a regression framework to examine the contemporaneous relationships between volatility, trading volume and open interest. To quantify the percentage of volatility that is caused by liquidity variables, the authors also regress the estimated volatilities on the measures of open interest and trading volume.FindingsThe authors find that: market depth has an effect on the volatility of futures markets but the direction of this effect depends on the type of contract, and there is evidence of a positive contemporaneous relationship between trading volume and futures volatility for all futures contracts. Impulse-response functions also show that trading volume has a more relevant role in explaining market volatility than open interest.Practical implicationsThese results are recommended to financial managers and analysts dealing with futures markets.Originality/valueTo the best of the authors’ knowledge, no study has yet considered a complete database of futures markets to investigate the empirical relation between price changes (volatility), trading volume and open interest in futures markets.

Journal

international Journal of Managerial FinanceEmerald Publishing

Published: Oct 10, 2016

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