State space modeling of price and volume dependence: Evidence from currency futures

Return-volume dynamics in futures markets

“…However, the evidence presented by Smirlock and Starks (1988) on stock markets and McCarthy and Najand (1993) on currency futures markets supports the sequential information arrival hypothesis. Nevertheless, the existing literature on information flow is based primarily on equity and bond markets, with the only exceptions of Karpoff (1988) and McCarthy and Najand (1993). Therefore, this article broadens the understanding of futures markets dynamics.…”

“…The volume-absolute return relationship is understood to reveal particulars about information dissemination and processing procedures in the market (Clark, 1973;Copeland, 1976;Epps 1975Epps , 1977Epps and Epps, 1976;Jennings, Starks and Fellingham, 1981;Tauchen and Pitts, 1983;Karpoff, 1987Karpoff, , 1988Smirlock and Starks, 1988;McCarthy and Najand, 1993;Najand and Yung, 1991). Two competing hypotheses explain the information arrival process in financial markets: the mixture of distributions hypothesis and the sequential information arrival hypothesis.…”

Futures Trading and Spot Market Volatility: Evidence from Indian Commodity Markets

“…Chang et al (2000) decomposed spot volatility estimates into expected and unexpected components and found that hedging activity in futures increases when unexpected volatility increases but speculative activity is not pretentious by the volatility. In currency market, Clifton (1985), Chatrath (1996), Grammatikos and Saunders (1986) and McCarthy and Najand (1993) positive correlation was found between spot price variability and volume of futures trading. However, Adrangi and Chatrath (1998) and Sarwar (2003) establish stabilizing effect of futures trading on currency market.…”

“…There are many studies which talk about this that futures trading may de-stabilize the spot market by making them more volatile (Cox, 1979;Figlewski, 1981;Clifton;Grammatikos and Saunders, 1986;McCarthy and Najand, 1993;Chatrath et al, 1996).On the other hand there is a divergent view on this stating that derivatives market stabilizes the spot market (Danthine, 1978;Kyle's, 1985, andFroot andPerold, 1991). Morgan (1999) concluded that the level of inventories held in the spot market will be determined by the basis and will ensure a more efficient process of private storage, which in turn, ensures a smoother pattern of prices in the spot market hence stabilise the market.…”

Modelling volatility in Indian currency market

“…The study reached to the conclusion that volumes causes price variability. McCarthy and Najand (1993) also find a positive relation between futures trading volume and futures volatility. Similar results were obtained in another study in context of Indian market where research supported the hypothesis that there exists a two way relationship between volatility in the spot exchange rate market and volumes in the currency futures (Bhargava and Malhotra, 2007;Sharma, 2011).…”