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Futures trading activity and stock price volatility: some extensions

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  • A. Chatrath
  • F. Song
  • B. Adrangi

Abstract

An earlier investigation by Bessembinder and Seguin employed open interest data to demonstrate that heavy (unexpected) trading activity in stock index futures is destabilizing. This article re-examines the issue in the framework of the commitments of four groups of traders in the S&P 500 index futures market: hedgers (institutional traders), large speculators, small traders and spreaders. Finding that surges in institutional commitments in index futures are followed by increased levels of price variability. The results are not conclusive on whether portfolio insurance strategies contribute to this relationship. Moreover, there is no evidence that the participation of other futures traders, notably large speculators and small traders, is destabilizing. An implication is that the current margins structure that favours institutional traders is ill-suited to the goal of volatility-control. The release of the commitment of trader data which provides open interest information on an ex post basis is found to have no impact on stock market volatility. Thus, the positive relationship between surges in institutional futures activity and volatility seems to stem from trading mechanisms, rather than from the formal disclosure of commitment of traders.

Suggested Citation

  • A. Chatrath & F. Song & B. Adrangi, 2003. "Futures trading activity and stock price volatility: some extensions," Applied Financial Economics, Taylor & Francis Journals, vol. 13(9), pages 655-664.
    • Handle: RePEc:taf:apfiec:v:13:y:2003:i:9:p:655-664
    DOI: 10.1080/09603100110115183
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    2. Andreas Röthig, 2011. "On speculators and hedgers in currency futures markets: who leads whom?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(1), pages 63-69, January.
    3. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    4. Evangelos Drimbetas & Nikolaos Sariannidis & Nicos Porfiris, 2007. "The effect of derivatives trading on volatility of the underlying asset: evidence from the Greek stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 139-148.
    5. Mayer, Herbert & Rathgeber, Andreas & Wanner, Markus, 2017. "Financialization of metal markets: Does futures trading influence spot prices and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 300-316.
    6. 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.
    7. Nikolaos Sariannidis & Evangelos Drimbetas, 2008. "Impact of international volatility and the introduction of Individual Stock Futures on the volatility of a small market," European Research Studies Journal, European Research Studies Journal, vol. 0(3), pages 119-119.
    8. Meenakshi Malhotra & Dinesh Kumar Sharma, 2016. "Volatility Dynamics in Oil and Oilseeds Spot and Futures Market in India," Vikalpa: The Journal for Decision Makers, , vol. 41(2), pages 132-148, June.
    9. Röthig, Andreas, 2008. "The Impact of Backwardation on Hedgers' Demand for Currency Futures Contracts: Theory versus Empirical Evidence," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35698, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    10. Andreas Röthig, 2012. "Cross‐Speculation In Currency Futures Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 272-278, July.
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    12. Röthig, Andreas, 2008. "The impact of backwardation on hedgers' demand for currency futures contracts: theory versus empirical evidence," Darmstadt Discussion Papers in Economics 190, Darmstadt University of Technology, Department of Law and Economics.

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