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Trading Activities and the Volatility of Return on Malaysian Crude Palm Oil Futures

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  • Xiu Wei Yeap

    (Economics Program, School of Social Sciences, Universiti Sains Malaysia, Gelugor 11800, Penang, Malaysia)

  • Hooi Hooi Lean

    (Economics Program, School of Social Sciences, Universiti Sains Malaysia, Gelugor 11800, Penang, Malaysia)

Abstract

Trading activities represent the flow of market information to the investors. This paper examines the effect of trading activities, i.e., trading volume and open interest, on the volatility of return for Malaysian Crude Palm Oil Futures. The GARCH model is applied by adding the expected and unexpected elements of trading activities (trading volume and open interest) as the independent variables. The results show that there is a negative contemporaneous relationship between the expected volume and volatility, but that a positive relationship exists between unexpected volume and volatility. On the contrary, the expected and unexpected open interest mitigate the volatility. Therefore, both trading volume and open interest should be considered together when information flows into the market.

Suggested Citation

  • Xiu Wei Yeap & Hooi Hooi Lean, 2022. "Trading Activities and the Volatility of Return on Malaysian Crude Palm Oil Futures," JRFM, MDPI, vol. 15(1), pages 1-15, January.
    • Handle: RePEc:gam:jjrfmx:v:15:y:2022:i:1:p:34-:d:723414
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    References listed on IDEAS

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    1. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    2. Lee, Bong-Soo & Rui, Oliver M., 2002. "The dynamic relationship between stock returns and trading volume: Domestic and cross-country evidence," Journal of Banking & Finance, Elsevier, vol. 26(1), pages 51-78, January.
    3. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    4. Toshiaki Watanabe, 2001. "Price volatility, trading volume, and market depth: evidence from the Japanese stock index futures market," Applied Financial Economics, Taylor & Francis Journals, vol. 11(6), pages 651-658.
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