When new information arrives on the market, agents react by trading until prices reach a revised, postinformation equilibrium. Trade occurs both in response to the arrival of new information on the assetâs value itself and as risk averse agents engage in hedge rebalancing trades.â Hedgers are motivated to trade in futures contracts to stabilize their future income flows or costs, with their volume of trading determined by their expectations of future spot (and futures) price movements. Similarly, speculators take an interest in futures contracts based upon their expectations of futuresâ price variability. The above process of revision results in changes in prices and trading volume; and, since they are both driven by the same directing variable, namely, the flow of information, it is expected that they will exhibit positive correlation. The precise nature of the relationship between price variability and volume has not, however, found consensus. 1 would like to express my gratitude to Antonios Antoniou and Ian Garrett for valuable guidance and suggestions, and to two anonymous referees for their constructive comments. It should be noted that a s traders switch from nearby contract to nex-nearby contract this creates volume that is not related to the arrival
The Journal of Futures Markets – Wiley
Published: Dec 1, 1995
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