Futures Trading: Informational Content of Open Interest and Trading Volume on Futures Price

In an agriculture dominated country, like India, farmers face not only yield risk but price risk as well. Commodity futures market play major role in the price risk management process, especially in agriculture. This study empirically analyses the informational content of open interest and trading volume on futures price determination on the basis of selected agricultural commodities. Breusch-Godfrey Serial Correlation LM Test is used for analyzing the role of informational content of open interest and trading volume on futures price. Empirical result shown that open interest playing a major role in futures price determination on commodity futures trading. In case of trading volume, the results show that a significant negative impact on futures price. The study strongly argues that the stockholders will be benefited through informational content of open interest and volume there by reducing the risk involved in the futures market. By monitoring the price trend, volume and open interest the technician is better able to measure the buying or selling pressure behind market moves. This will provide traders with valuable information to develop a suitable pricing strategy and an appropriate production and marketing plan for producers farming.