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The effect of net positions by type of trader on volatility in foreign currency futures markets

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  • Wang, Changyun

Abstract

We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co-vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets.

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File URL: http://mpra.ub.uni-muenchen.de/36428/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 36428.

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Date of creation: Mar 2001
Date of revision: Nov 2001
Publication status: Published in Journal of Futures Markets 5.22(2002): pp. 427-450
Handle: RePEc:pra:mprapa:36428

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Keywords: Foreign currency exchange futures; return predictability;

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References

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  1. Simon Gervais & Ron Kaniel & Dan Mingelgrin, . "The High Volume Return Premium," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 1-99, Wharton School Rodney L. White Center for Financial Research.
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  7. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1997. "Is There Private Information in the FX Market? The Tokyo Experiment," NBER Working Papers 5936, National Bureau of Economic Research, Inc.
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  11. Bessembinder, Hendrik & Seguin, Paul J., 1993. "Price Volatility, Trading Volume, and Market Depth: Evidence from Futures Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 28(01), pages 21-39, March.
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  15. Bong-Chan, Kho, 1996. "Time-varying risk premia, volatility, and technical trading rule profits: Evidence from foreign currency futures markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 41(2), pages 249-290, June.
  16. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 22(01), pages 109-126, March.
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Cited by:
  1. S. Bhaumik & M. Karanasos & A. Kartsaklas, 2008. "Derivatives Trading and the Volume-Volatility Link in the Indian Stock Market," William Davidson Institute Working Papers Series wp935, William Davidson Institute at the University of Michigan.
  2. Bohl, Martin T. & Stephan, Patrick M., 2013. "Does Futures Speculation Destabilize Spot Prices? New Evidence for Commodity Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 45(04), November.

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