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Implications of futures trading volume: Hedgers versus speculators

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  • Kenneth Yung

    (College of Business and Public Administration, Old Dominion University)

  • Yen-Chih Liu

Abstract

The high trading volume in securities markets has puzzled researchers for years. Recently, overconfidence models have offered testable implications to address the puzzle. In this study, we proved empirically that investors have different degrees of overconfidence in trading securities. Using information in the Commitments of Traders reports of the Commodity Futures Trading Commission to differentiate between hedgers and speculators, we find relatively strong and consistent evidence of overconfident trading among futures speculators only. There are four major findings in our results. First, speculators trade more (less) aggressively following gains (losses) in futures markets. Second, speculators trade more (less) aggressively following gains (losses) of related stocks in the stock market. Third, gains (losses) of less-related stocks, however, do not affect the trading of futures speculators. Finally, it is found that overconfident futures speculators assume more (less) risk following market gains (losses). Given that overconfident investors tend to overestimate investment returns, our findings may have important implications for investors in zero-sum financial markets.

Suggested Citation

  • Kenneth Yung & Yen-Chih Liu, 2009. "Implications of futures trading volume: Hedgers versus speculators," Journal of Asset Management, Palgrave Macmillan, vol. 10(5), pages 318-337, December.
    • Handle: RePEc:pal:assmgt:v:10:y:2009:i:5:d:10.1057_jam.2009.31
    DOI: 10.1057/jam.2009.31
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    2. Yiuman Tse & Michael Williams, 2011. "Does Index Speculation Impact Commodity Prices? An Intraday Futures Analysis Using intraday data, we find that unidirectional causality runs from commodity index linked commodity futures to non-index ," Working Papers 0007, College of Business, University of Texas at San Antonio.
    3. Mingue SUn, 2010. "A Branch-and-Bound Algorithm for Representative Integer Efficient Solutions in Multiple Objective Network Programming Problems," Working Papers 0007, College of Business, University of Texas at San Antonio.
    4. Yiuman Tse & Michael R. Williams, 2013. "Does Index Speculation Impact Commodity Prices? An Intraday Analysis," The Financial Review, Eastern Finance Association, vol. 48(3), pages 365-383, August.
    5. Tokic, Damir, 2012. "Speculation and the 2008 oil bubble: The DCOT Report analysis," Energy Policy, Elsevier, vol. 45(C), pages 541-550.
    6. Bahloul, Walid & Bouri, Abdelfettah, 2016. "Profitability of return and sentiment-based investment strategies in US futures markets," Research in International Business and Finance, Elsevier, vol. 36(C), pages 254-270.
    7. Elina Pradkhan, 2016. "Information Content of Trading Activity in Precious Metals Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(5), pages 421-456, May.

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