Lead‐lag relationships between trading volume and price variability: New evidence

Abstract

nterest has long existed among followers of commodity futures markets about the I relationship between trading volume and price variability. Critics of futures markets argue that increased trading vohme, especially by speculators, leads to increased price volatility. This can lead to greater uncertainty and less market efficiency, suggesting that regulatory limits curbing speculative positions and daily trading activities be established.Others argue that increased price variability due to changing economic conditions attracts more trading, creating more market liquidity and leading eventually to less price volatility than if volume did not increase. This suggests that there be less regulation of traders and their activities.In between these scenarios is the one where daily trading activity and price volatility increase and decrease simultaneously. That is, one activity does not necessarily lead or lag the other, but that they move up and down in concert as economic conditions change. A high degree of simultaneity between volume and price changes can indicate liquid and efficient markets where the response to new information is nearly instantaneous.

Market volatility and the demand for hedging in stock index futures

“…Streeter and Tomek (1992) develop a model with a large 2 Considerable research has been done regarding financial market participation and price volatility using volume as the measure of participation. For example, Clark (1973), Cornell (1981), Tauchen and Pitts (1983), Garcia, Leuthold, and Zapata (1986), and Grammatikos and Saunders (1986) have studied the relationship between volume and volatility in futures markets. Epps and Epps (1976) and Smirlock and Starks (1985) studied similar phenomena for equities.…”

Big Fish: Oil Markets and Speculation

“…As outlined in Section 3, we believe that the role of speculation in the crude oil market can be properly described by the relative importance of positions 13 Variable that, as we have seen, is characterized by a unit root, i.e. Dis Pt is I(1).…”

“…At this purpose, the following equation is estimated through Ordinary Least Square (OLS) econometric techniques: The crude oil price (expressed as ratio to the equilibrium price) 13 is modeled through a mean reverting process with reversion speed ω 1 . Our idea is to test whether the amount of speculative positions in the market increases, ω 1 < 0 (or decreases, ω 1 > 0) the speed of adjustment to the equilibrium price.…”

Open and Closed Positions and Stock Index Futures Volatility

“…Secondly, there is a controversy about its influence on volatility. Whereas Watanabe (2001), Li (2007), and 1 Furthermore, there is evidence that supports the same relation in the case of equities (see Epps and Epps (1976), Smirlock and Starks (1985) and Schwert (1989)), as well as commodities (see Garcia et al (1986)). 2 It seems that this relationship is general for most financial assets.…”