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An Analysis on Trading Behaviors of Currency Futures: Evidence from BRICS Countries

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  • Chiu-Lan Chang
  • Ming Fang

Abstract

This study uses Markov-switching vector autoregressive analysis (MSVAR) to examine the interaction between the trading activities of hedgers and speculators for the currency futures of four BRICS emerging countries traded on the Chicago Mercantile Exchange (CME). First, we investigate the effect of net positions by type of trader to test the relation between currency futures volatility and the trading positions. We employ Granger Causality tests to analyze lead and lag relations between currency futures volatility and the trading positions. Second, we investigate the dynamic interactions between futures price volatility and traders’ trading activities using MSVAR under a generalization of Hamilton’s model to a vector auto-regressive framework we can identify regime shifts occurring mainly simultaneously. Main ï¬ nding is that speculators and day traders destabilize the market for futures. Whether hedgers stabilize or destabilize the market is inconclusive. The results suggest that speculators’ demand for futures goes down in response to increased volatility.

Suggested Citation

  • Chiu-Lan Chang & Ming Fang, 2015. "An Analysis on Trading Behaviors of Currency Futures: Evidence from BRICS Countries," Accounting and Finance Research, Sciedu Press, vol. 4(2), pages 134-134, May.
    • Handle: RePEc:jfr:afr111:v:4:y:2015:i:2:p:134
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    References listed on IDEAS

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    1. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1996. "The role of futures trading activity in exchange rate volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(5), pages 561-584, August.
    2. Bahram Adrangi & Arjun Chatruth, 1998. "Futures Commitments and Exchange Rate Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(3‐4), pages 501-520, April.
    3. 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, vol. 28(1), pages 21-39, March.
    4. Bessembinder, Hendrik & Seguin, Paul J, 1992. "Futures-Trading Activity and Stock Price Volatility," Journal of Finance, American Finance Association, vol. 47(5), pages 2015-2034, December.
    5. Chang, Ya-Kai & Chen, Yu-Lun & Chou, Robin K. & Gau, Yin-Feng, 2013. "The effectiveness of position limits: Evidence from the foreign exchange futures markets," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4501-4509.
    6. Bahram Adrangi & Arjun Chatruth, 1998. "Futures Commitments and Exchange Rate Volatility," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(3&4), pages 501-520.
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    Cited by:

    1. Fang, Ming & Chang, Chiu-Lan & Zhang, Qi, 2023. "Impacts of trading restrictions on price volatilities and speculative activities: Evidence from CSI 300 futures," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 184-204.

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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