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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/36428/1/MPRA_paper_36428.pdf
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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;

Find related papers by JEL classification:

  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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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, vol. 45(04), November.

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