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Which liquidity indicator is more informative to market volatility? Spectrum analysis of China’s base metal futures market

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  • Chen, Xiangyu
  • Tongurai, Jittima

Abstract

By applying the frequency domain causality test and cross-spectral coherence analysis, this study investigates the informational effects of liquidity indicators on the volatility of China’s base metal futures market from January 2016 to June 2022. We find that trading volume is more informative in economically explaining the price variations of most base metal futures for all frequency horizons, while open interest is more informative to Granger-cause economic innovations in the market volatility of the lead and nickel futures markets both in the short and long run. The coherence levels between the underlying frequency components for open interest are found to be greater than those for trading volume, suggesting that price volatility in China’s base metal futures market would be more responsive to shocks in open interest.

Suggested Citation

  • Chen, Xiangyu & Tongurai, Jittima, 2023. "Which liquidity indicator is more informative to market volatility? Spectrum analysis of China’s base metal futures market," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000852
    DOI: 10.1016/j.najef.2023.101962
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    References listed on IDEAS

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    1. Toshiaki Watanabe, 2001. "Price volatility, trading volume, and market depth: evidence from the Japanese stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(6), pages 651-658.
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    6. Czudaj, Robert L., 2019. "Dynamics between trading volume, volatility and open interest in agricultural futures markets: A Bayesian time-varying coefficient approach," Econometrics and Statistics, Elsevier, vol. 12(C), pages 78-145.
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