The role of futures trading activity in exchange rate volatility

Chatrath, Arjun; Ramchander, Sanjay; Song, Frank M.

doi:10.1002/(sici)1096-9934(199608)16:5<561::aid-fut4>3.0.co;2-e

Cited by 74 publications

(48 citation statements)

References 47 publications

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“…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.…”

supporting

confidence: 74%

“…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.…”

mentioning

confidence: 89%

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

Sehgal¹,

Rajput

Dua

2012

AJFA

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In the context of emerging Indian commodity futures markets, this paper empirically examines the effect of futures trading activity (trading volume ; proxy of futures liquidity) on spot price volatility for seven agricultural commodities (guar seeds, turmeric, soya bean, black pepper, barley, Maize and Castor Seed).We decompose the futures volume into expected and unexpected components using Hodrick-Prescott filter (HP filter) .To clearly understand the destabilization effect, the relationship of the unexpected liquidity of futures market is done with Unexpected volatility of spot market returns which is estimated by taking the residuals of the GARCH model. We find that unexpected futures trading volume is Granger causing spot price volatility and are significant for five out of seven agricultural commodities (Guarseed, Turmeric, Soybean, Maize and Castor Seed), consistent with Bessembinder and Seguin (1992).We find reversed effect for one commodity i.e. Pepper the effect of spot volatility on futures trading and for Barley no causality is revealed either from

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supporting

confidence: 74%

mentioning

confidence: 89%

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

Sehgal¹,

Rajput

Dua

2012

AJFA

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“…Streeter and Tomek (1992) consider monthly data on soybeans future prices and find a positive and significant sign of scalping on prices volatility. Chatrath et al (1996) Overall, previous research finds that long term speculation (proxied by Working's T index) has a negative impact on price variability, while short term (measured by the ratio of volume to open interest) has a positive impact (Peck, 1981;Roswell and Purcell, 1992;Streeter and Tomek, 1992).…”

Section: )mentioning

confidence: 99%

Futures Price Volatility in Commodities Markets: The Role of Short Term vs Long Term Speculation

2013

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This paper evaluates how different types of speculation affect the volatility of commodities' futures prices. We adopt four indexes of speculation: Working's T, the market share of non-commercial traders, the percentage of net long speculators over total open interest in future markets, which proxy for long term speculation, and scalping, which proxies for short term speculation. We consider four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) and seven non-energy commodities (cocoa, coffee, corn, oats, soybean oil, soybeans and wheat) over the period 1986-2010 analyzed at weekly frequency. Using GARCH models we find that speculation significantly affects volatility of returns: short term speculation has a positive and significant impact on volatility, while long term speculation generally has a negative effect. The robustness exercise shows that: i) scalping is positive and significant also at higher and lower data frequencies; ii) results remain unchanged through different model specifications (GARCH-in-mean, EGARCH, and TARCH); iii) results are robust to different specifications of the mean equation.JEL Codes: C32; G13; Q11; Q43.

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“…The study conducted by Chatrath et al (1996) examined the relationship between volatility in the spot rates and level of currency futures in context of pound, Canadian dollar, Japanese yen, Swiss franc and Deutsche mark. The results of their study provided evidence of positive impact of trading in futures on volatility in the exchange rate market but the feedback effect of return of spot exchange rates was found to be weak.…”

Section: Studies In Currency Futures and Spot Exchange Rate Marketsmentioning

confidence: 93%

“…The basic objective of standardisation of the volumes was to create a balance between speculative and hedging activities (Chatrath et al, 1996;Bessembinder and Seguin, 1993;Luu and Martens, 2003;Garcia et al, 1986).…”

Section: Variables Used In the Studymentioning

confidence: 99%

Modelling volatility in Indian currency market

Mittal

Kumar

2016

IJBD

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Abstract:The present paper aims at studying the relationship between volatility in the exchange rate in the spot market and trading activity in the currency futures market. The data used in this paper comprises of daily exchange rate of USD in terms of Indian rupees for the sample period 1 January 2006 to 12 September 2011. The volatility of the exchange rates has been measured by applying suitable GARCH model. For establishing the feedback causality between the volatility in the spot exchange rate and trading activity in the currency futures market Granger causality test has been applied. The results of the study report a significant difference in the mean volatility in spot exchange rates return in pre futures period and post futures period. The estimated mean volatility is higher in post futures period indicating that futures have resulted in increase in the spot exchange rate returns. Further, the results of Granger causality test establish the bi-directional relationship between volatility in exchange rate returns and volumes in currency futures.

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The role of futures trading activity in exchange rate volatility

Cited by 74 publications

References 47 publications

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

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

Futures Price Volatility in Commodities Markets: The Role of Short Term vs Long Term Speculation

Modelling volatility in Indian currency market

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