Volatility and trading demands in stock index futures

✍ Scribed by Ming-Shiun Pan; Y. Angela Liu; Herbert J. Roth

• Publisher: John Wiley and Sons
• Year: 2003
• Tongue: English
• Weight: 127 KB
• Volume: 23
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10067

✦ Synopsis

Abstract

In this study we examine how volatility and the futures risk premium affect trading demands for hedging and
speculation in the S&P 500 Stock Index futures contracts. To ascertain if different volatility measures matter
in affecting the result, we employ three volatility estimates. Our empirical results show a positive relation
between volatility and open interest for both hedgers and speculators, suggesting that an increase in volatility
motivates both hedgers and speculators to engage in more trading in futures markets. However, the influence of
volatility on futures trading, especially for hedging, is statistically significant only when spot volatility is
used. We also find that the demand to trade by speculators is more sensitive to changes in the futures risk
premium than is the demand to trade by hedgers. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:399–414,
2003