Review of Quantitative Finance and Accounting, 10 (1998): 285–302
© 1998 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Volume and Volatility in Foreign Currency Futures
Faculty of Business, School of Finance and Economics, University of Technology, Sydney, PO Box 123,
Broadway NSW 2007, Australia
A. G. MALLIARIS
Walter F. Mullady, Sr. Professor of Business Administration, Department of Economics, Loyola University of
Chicago, 820 N. Michigan Avenue, Chicago, Illinois 60611
Abstract. In this paper we propose and test several hypotheses concerning time series properties of trading
volume, price, short and long-term relationships between price and volume and the determinants of trading
volume in forcign currency futures. The nearby contracts for British Pound, Canadian Dollar, Japanese Yen,
German Mark and Swiss Franc are analyzed in three frequencies i.e. daily, weekly and monthly.
We ﬁnd supportive evidence for all the ﬁve currencies that the price volatility is a determinant of the trading
volume changes. Furthermore, the volatility of the price process is a determinant of the unexpected component
of the changes in trading volume. Also, there is a signiﬁcant relationship between the volatility of price and the
volatility of trading volume changes for three of the ﬁve currencies in the daily frequency and for one currency
in the monthly frequency.
Key words: Volume, volatility, currency
Most economic reports published by the futures exchanges and regulatory agencies use
volume data to measure the growth or decline of the futures contracts. Also, as exchanges
research for the possible introduction of a new type of futures contract, the potential
futures volume of trade in such a contract receives primary attention as a proxy for the
contract’s liquidity. Furthermore, volume data are used to measure shifts in the compo-
sition of futures markets, as can be illustrated by the phenomenal growth in the contract
volume of ﬁnancial futures compared to agricultural futures.
In addition to exchanges and regulatory agencies being interested in the behavior of the
volume of trading, traders themselves pay attention to trading volume. Low volume,
usually implies that the market is illiquid and the bid/ask spread will tend to be large,
resulting in high price volatility. Such a market will discourage hedgers, but may beneﬁt
speculators. On the other hand, high trading volume contributes to high liquidity and the
bid/ask spread will tend to be small, resulting in low price variability. Hedgers prefer low
day to day volatility while speculators usually do not because low volatility reduces
@ats-ss5/data11/kluwer/journals/requ/v10n3art3 COMPOSED: 02/06/98 8:17 am. PG.POS. 1 SESSION: 6