Dynamics of Foreign Exchange Futures Trading Volumes in Thailand

Abstract

Following the introduction of EUR/USD futures and USD/JPY futures on 31 October 2022, Thailand Futures Exchange first entered the top 11 list of derivatives exchanges based on foreign exchange derivative volumes in 2022. This paper investigates the dynamics of foreign exchange futures trading volumes in Thailand through the VAR(2) model. Trading volumes of EUR/USD futures, USD/JPY futures, and USD/THB futures are considered over the sample period from 31 October 2022 to 12 January 2024. The empirical results provide no evidence that the trading volume of EUR/USD futures is dependent on the past trading volumes of USD/JPY futures and USD/THB futures. The Granger causality test results show the existence of bidirectional causality between the trading volumes of USD/JPY futures and USD/THB futures. The results of the impulse response function are consistent with the sign results of the VAR(2) model, showing that the USD/JPY futures trading volume has a negative impact on the USD/THB futures trading volume, and vice versa. The analysis of variance decomposition shows that the variability of the USD/JPY futures trading volume and USD/THB futures trading volume, apart from its own shock, is explained by other FX futures trading volume shocks. Therefore, traders should pay more attention to new FX futures trading activity due to its negative impact on the USD/THB futures trading volume and its contribution to the variance in the USD/THB futures trading volume. Understanding the futures trading volume relationship also helps Thailand Futures Exchange develop new products and services that can foster market liquidity and stability.