Futures trading volume as a determinant of prices in different momentum phases (original) (raw)
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Mathematics and Computers in Simulation, 2008
Trading imbalances reflect the quality of market information and may contain more information than the number of trades or trading volume. In order to better understand how trading imbalances play a role different from traditional variables (i.e., number of trades and trading volume) in explaining volatility, we use intraday data to examine the dynamic relations among return volatility, trading imbalances, and traditional variables for E-mini S&P 500 futures and Japanese Yen futures contracts, respectively. The Granger-causality tests indicate strong feedback effects between volatility and trading variables, confirming the informationbased and hedging-based trading. We also compare the results of the traditional volumes and trading imbalances through variance decomposition and impulse responses analysis. It is shown that the sequential arrival of private information through trading imbalance is more important in explaining return volatility than the traditional variables, which are a proxy for the public information.
The Effect of Futures Trading Activity on the Distribution of Spot Market Returns
2003
There is extensive empirical research on the potential destabilizing effects of futures trading activity on spot market volatility. Rather than just focussing on spot volatility, this paper deals with the contemporaneous relationship between futures trading volume and the overall probability distribution of spot market returns. To disentangle the potential destabilizing effect of futures trading activity from cross-interactions due to price discovery process, futures volume is broken down into two drivers: expected and unexpected trading activity. Then, a non-parametric approach is used to estimate the density function of spot return conditional to both spot and futures trading volume. Empirical evidence using intraday data from the Spanish stock index futures market over the period 2000-2002 is provided. Our empirical findings can be summarized as follows: i) spot market volatility is positively related to spot trading volume, ii) for any given spot trading volume, a significant an...
Research Journal of Finance and Accounting
The objective of this article is to examine the impact of stock index futures on stock markets. Of particular interest is the evidence for change in overall volatility and liquidity after the introduction of stock index futures. The impact of derivatives trading on price volatility in the underlying spot market return is examined using the exponential GARCH (EGARCH) model which was proposed by Nelson (1991). Our empirical findings support the view that introducing futures trading decreases volatility in the spot market and the speed with which market information is reflected in spot market prices. However, volatility persistence increased in the post-futures period. In the light of these findings it can be said that the speed and nature of information differ between pre-futures period and post-futures period.
The price-volume relationship of the Malaysian stock index futures market
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The objective of this study is to determine the relationship and the causality between the price index and trading volume for both the spot and the next month contracts in the Malaysian stock index futures market and how that relationship changes over time. The daily data of the stock index futures (FKLI) closing price and the daily data of the stock index futures (FKLI) trading volume from December 15, 1995 until December 31, 2003 are used in this study. The data are divided into four sub-periods, a learning period, a crisis period, a recovery period and a stable period, to analyze the variation in activity during the opening of the new market, the Asian financial crisis in 1997-1998, the recovery period after the financial crisis, and a stable period. The findings provide information to allow investors to use the price-volume relationship in both the spot-month and the next-month contracts to speculate or to hedge their portfolios.
Volatility Impact of Stock Index Futures Trading - A Revised Analysis
The recent financial crisis revealed some serious shortcomings in over-the-counter (OTC)-derivatives markets and renewed concerns about a possible destabilizing impact of derivatives trading in general and OTC derivatives trading in particular on financial market stability. In order to strengthen transparency in OTC derivatives markets and deploy presumed advantages of classic derivatives trading the implication of a central counterparty and exchange-based trading is highly recommended for these derivatives. However, this desirable stabilizing and volatility-reducing impact of classic, regulated derivatives trading has been questioned on theoretical grounds, and empirical findings are still inconclusive. The present contribution aims to show that by appropriately rectifying some methodological shortcomings of previous studies a stabilizing impact of derivatives trading can be demonstrated very well. This paper analyzes the volatility impact of DAX futures trading using the GARCH fra...
Information flow between return and trading volume in Malaysian futures market
AFRICAN JOURNAL OF BUSINESS MANAGEMENT, 2012
This paper examined the causal effect between return and trading volume using Kuala Lumpur options and financial futures exchange (KLOFFE) daily data from 1995 to 2009. With univariate autoregressive generalized autoregressive conditional heteroscedasticity (AR-GARCH) model, the cross-correlation function (CCF) indicated that there is causality in mean from lag one of trading volume to return, which suggests significant changes in volume in previous day, may result in either a positive or negative shift to the current price. In order to examine the presence of three information arrival theories in futures market, an augmented AR-GARCH model with relevant lags was used. Notably, it is found that dependence causality in mean and variance from trading volume to return has disappeared. This implies that information spillover is not present in the interaction of price and volume. In conclusion, a reasonable thesis to support this result is the existence of noise traders' hypothesis in Malaysian futures market.
Futures trading and the underlying stock volatility: A case of the FTSE/JSE TOP 40
International Journal of Finance and Accounting, 2021
Purpose: This study analyzed the impact of listing and trading futures contracts on the underlying stock index volatility behavior. The FTSE/JSE TOP 40 index was the index of interest. Methodology: To capture the non-constant variance of the residuals, a modified Generalized Autoregressive Conditionally Heteroscedasticity (GARCH) model was adopted given that financial time series data exhibited ARCH effects. The GARCH model was estimated after dividing the sample period into pre-and post-futures eras. Findings: The research findings point towards stabilization effects on underlying stock volatility and refute the suggestion that futures markets improve the dissemination of information to the corresponding spot markets. On the same note, the introduction of futures increased the volatility persistence of index returns. Unique contribution to theory, policy, and practice: This paper applied a modified-GARCH by incorporating a dummy variable to the traditional GARCH model. The study u...