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Futures Trading Activity and Commodity Cash Price Volatility

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  • Jian Yang
  • R. Brian Balyeat
  • David J. Leatham

Abstract

This paper examines the lead‐lag relationship between futures trading activity (volume and open interest) and cash price volatility for major agricultural commodities. Granger causality tests and generalized forecast error variance decompositions show that an unexpected increase in futures trading volume unidirectionally causes an increase in cash price volatility for most commodities. Likewise, there is a weak causal feedback between open interest and cash price volatility. These findings are generally consistent with the destabilizing effect of futures trading on agricultural commodity markets.

Suggested Citation

  • Jian Yang & R. Brian Balyeat & David J. Leatham, 2005. "Futures Trading Activity and Commodity Cash Price Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(1‐2), pages 297-323, January.
    • Handle: RePEc:bla:jbfnac:v:32:y:2005:i:1-2:p:297-323
    DOI: 10.1111/j.0306-686X.2005.00595.x
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