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Volatility, open interest, volume, and arbitrage: evidence from the S&P 500 futures market

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  • Stephen Ferris
  • Hun Park
  • Kwangwoo Park

Abstract

Using a vector autoregressive (VAR) approach, the dynamic interactions and causal relationships among volatility, open interest, trading volume and arbitrage opportunities in the S&P 500 index futures market is examined. It is found that increased volatility lowers pricing error. This implies that as market volatility increases, investors sell off their equity and futures positions with relatively larger drops in futures prices. Pricing error plays a critical role in linking implied volatility and the level of open interest. Open interest rises for a few days in response to a pricing error shock, but pricing error declines over the next day after an initial rise in response to an innovation in open interest. This suggests that the level of open interest is a good proxy for examining the capital flows into and out of the nearest S&P 500 index futures contract.

Suggested Citation

  • Stephen Ferris & Hun Park & Kwangwoo Park, 2002. "Volatility, open interest, volume, and arbitrage: evidence from the S&P 500 futures market," Applied Economics Letters, Taylor & Francis Journals, vol. 9(6), pages 369-372.
    • Handle: RePEc:taf:apeclt:v:9:y:2002:i:6:p:369-372
    DOI: 10.1080/13504850110074155
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    Cited by:

    1. 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.
    2. Christos Floros, 2007. "Price and Open Interest in Greek Stock Index Futures Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 6(2), pages 191-202, May.
    3. Stéphane Yen & Ming-Hsiang Chen, 2010. "Open interest, volume, and volatility: evidence from Taiwan futures markets," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 34(2), pages 113-141, April.
    4. Vipul, 2008. "Mispricing, Volume, Volatility and Open Interest," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(3), pages 263-292, December.
    5. Smimou, K., 2017. "Does gold Liquidity learn from the greenback or the equity?," Research in International Business and Finance, Elsevier, vol. 41(C), pages 461-479.
    6. Souček, Michael, 2013. "Crude oil, equity and gold futures open interest co-movements," Energy Economics, Elsevier, vol. 40(C), pages 306-315.
    7. Karthika P. DEVAN & Johney JOHNSON, 2021. "A pragmatic evaluation of the interconnection between currency futures return volatility, open interest and volume," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(626), S), pages 289-296, Spring.
    8. Antonakakis, Nikolaos & Floros, Christos & Kizys, Renatas, 2016. "Dynamic spillover effects in futures markets: UK and US evidence," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 406-418.
    9. Parizad Phiroze Dungore & Sarosh Hosi Patel, 2021. "Analysis of Volatility Volume and Open Interest for Nifty Index Futures Using GARCH Analysis and VAR Model," IJFS, MDPI, vol. 9(1), pages 1-11, January.
    10. Antonakakis, Nikolaos & Kizys, Renatas & Floros, Christos, 2014. "Dynamic Spillover Effects in Futures Markets," MPRA Paper 53876, University Library of Munich, Germany.

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