Volume and Volatility Surrounding Quarterly Redesignation of the Lead S&P 500 Futures Contract

✍ Scribed by Ira G. Kawaller; Paul D. Koch; John E. Peterson

• Publisher: John Wiley and Sons
• Year: 2001
• Tongue: English
• Weight: 189 KB
• Volume: 21
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.2202

✦ Synopsis

Abstract

During the last weeks before each quarterly expiration of Standard & Poor's (S&P) 500
futures, the bulk of trading volume begins to shift away from the next‐to‐expire (nearby or
lead) contract toward the second‐to‐expire (next out) contract. At some point, the
exchange formally redesignates the next out as the new lead contract, and the next out replaces the nearby in
the futures pit location designated for the lead contract. This event invariably results in a dramatic increase
(decrease) in trading activity in the next out (nearby) contract. This shift in relative
trading volumes is due to the microstructure of the futures exchange rather than new information or underlying
volatility conditions. The event thus offers us an opportunity to examine how volatility responds to
noninformation‐based exogenous changes in volume. This study examines the volatility behavior of nearby
and next out S&P 500 futures contracts on the 10 days surrounding quarterly redesignation of the lead
contract. Our model measures possible changes in (a) the level of volatility and/or (b)
the association between volume and volatility after redesignation of the lead contract. Results indicate that
when we account for the association between volume and volatility, the higher volume lead contract consistently
experiences a lower level of volatility. This outcome supports the view that the larger population of liquidity
providers who trade the more active lead contract fosters greater market depth and lower volatility. © 2001
John Wiley & Sons, Inc. Jrl Fut Mark 21:1119–1149, 2001