Volatility and trading activity following changes in the size of futures contracts
AbstractThis paper has two purposes. First, we examine the relationship between daily price volatility and trading activity one year before and after a change in contract size by examining the results of contract splits in the Australian share price index futures and the U.K. FTSE-100 futures contracts and a reverse contract split in the Australian Bank Bill Acceptance futures contract. Second, we evaluate the effect of the change in contract size on the use of the particular futures market. We find that after a contract size change, the change in total trading frequency has the power to explain the change in daily price volatility. Specifically, after a contract split, trading frequency increased, resulting in increased daily price volatility, and vice versa after a reverse contract split. Most of the average trade size variable has an immaterial impact on price volatility. However, decomposing the total trading frequency into four trade size classes, we find that the trading frequency for small and large trade size categories are highly significant in explaining changes in daily price volatility after the contract splits. Finally, we find the change in contract size for each futures market was successful because within three years following the change, the adjusted trading volume and open interest surpassed the levels prior to the change and have continued to increase thereafter.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Empirical Finance.
Volume (Year): 17 (2010)
Issue (Month): 5 (December)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jempfin
Price volatility Trading frequency Trade size Futures contract size Success and failure of futures contracts;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karagozoglu, Ahmet K & Martell, Terrence F, 1999. "Changing the Size of a Futures Contract: Liquidity and Microstructure Effects," The Financial Review, Eastern Finance Association, vol. 34(4), pages 75-94, November.
- Kryzanowski, Lawrence & Zhang, Hao, 1996. "Trading Patterns of Small and Large Traders around Stock Split Ex-dates," Journal of Financial Research, Southern Finance Association & Southwestern Finance Association, vol. 19(1), pages 75-90, Spring.
- Schwert, G William, 1989.
" Why Does Stock Market Volatility Change over Time?,"
Journal of Finance,
American Finance Association, vol. 44(5), pages 1115-53, December.
- G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
"Noise Trader Risk in Financial Markets,"
J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989.
"Positive Feedback Investment Strategies and Destabilizing Rational Speculation,"
NBER Working Papers
2880, National Bureau of Economic Research, Inc.
- De Long, J Bradford, et al, 1990. " Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-95, June.
- Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
- Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
- Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
- Dubofsky, David A, 1991. " Volatility Increases Subsequent to NYSE and AMEX Stock Splits," Journal of Finance, American Finance Association, vol. 46(1), pages 421-31, March.
- Bollen, Bernard & Inder, Brett, 2002.
"Estimating daily volatility in financial markets utilizing intraday data,"
Journal of Empirical Finance,
Elsevier, vol. 9(5), pages 551-562, December.
- Bernard Bollen & Brett Inder, 1999. "Estimating Daily Volatility in Financial Markets Utilizing Intraday Data," Working Papers 1999.01, School of Economics, La Trobe University.
- De Long, J Bradford, et al, 1989.
" The Size and Incidence of the Losses from Noise Trading,"
Journal of Finance,
American Finance Association, vol. 44(3), pages 681-96, July.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "The Size and Incidence of the Losses from Noise Trading," NBER Working Papers 2875, National Bureau of Economic Research, Inc.
- Cuny, Charles J, 1993. "The Role of Liquidity in Futures Market Innovations," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 57-78.
- Huang, Roger D. & Masulis, Ronald W., 2003. "Trading activity and stock price volatility: evidence from the London Stock Exchange," Journal of Empirical Finance, Elsevier, vol. 10(3), pages 249-269, May.
- Tashjian, Elizabeth, 1995. "Optimal futures contract design," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 153-162.
- Chris Downing & Frank Zhang, 2004. "Trading Activity and Price Volatility in the Municipal Bond Market," Journal of Finance, American Finance Association, vol. 59(2), pages 899-931, 04.
- Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
- Ohlson, James A. & Penman, Stephen H., 1985. "Volatility increases subsequent to stock splits: An empirical aberration," Journal of Financial Economics, Elsevier, vol. 14(2), pages 251-266, June.
- Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
- Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
- Black, Fischer, 1986. " Noise," Journal of Finance, American Finance Association, vol. 41(3), pages 529-43, July.
- Kamara, Avraham & Koski, Jennifer Lynch, 2001. "Volatility, autocorrelations, and trading activity after stock splits," Journal of Financial Markets, Elsevier, vol. 4(2), pages 163-184, April.
- Berkman, Henk & Brailsford, Tim & Frino, Alex, 2005. "A note on execution costs for stock index futures: Information versus liquidity effects," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 565-577, March.
- Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.