Purpose
The purpose of this paper is to assess trading strategies adopted by each large trader group and examine their effects on the volatility in the interest rate futures markets.
Design/methodology/approach
The Grinblatt et al.'s (1995) measure of momentum strategy is used to estimate the degree momentum and contrarian strategies. Then, regression analysis is used to determine the effects of trading strategies on volatility.
Findings
Up until 2005, the trades by non-clearing member firms in the futures market were separated from institutional traders providing us the opportunity to study trading strategies adopted by large distinct trading groups and its effects on volatility in the futures markets. It is found that individual traders use momentum strategy, whereas market makers and institutional traders use contrarian strategy. Momentum strategy adopted by individual traders increases volatility whereas contrarian strategy dampens volatility. Moreover, it is found that institutional traders engage more actively in contrarian trading when individual traders cause excessive volatility. The two distinct trading groups were separately tracked prior to 2005 giving us a unique window to determine the effect of the traders that conduct momentum trading as opposed to the ones that are contrarian traders. After the reclassification, the institutional trading group exhibited weaker contrarian strategy which can be attributed to the inclusion of non-clearing firm traders.
Originality/value
This study documents the first empirical evidence that shows off-exchange futures trader group is not composed of only pure noise makers, but there are short-term forecasters in its group. The authors also show a unique finding that noises caused by off-exchange group is from momentum strategy that they use, whereas contrarian strategy is used by institutional trader lower volatility.
Determinants of a firm’s cash holdings have been a popular topic of research in finance, especially after the rapid surge in cash holdings for U.S. firms since the 1980s. The wide array of research has focused primarily on firm-specific factors to explain the cross-sectional variations but has found insufficient explanatory power for the variations in cash holdings. We incorporate variables for macroeconomic conditions and uncertainty with firm-specific variables. Using 19,223 firms with 213,663 firm-year observations from 1971 to 2019 and introducing five variables for macroeconomic conditions of the Aruoba–Diebold–Scotti index and three variables for macroeconomic and financial uncertainty, we find that a firm’s sensitivity to macroeconomic conditions and uncertainty plays important role in determining the level of cash holdings. We find supportive evidence from the robustness test with the firm’s age that variables for macroeconomic variables have an impact on the level of cash holdings irrespective of the firm’s age.
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