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Small Traders in Currency Futures Markets

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Abstract

This study examines the interrelation between small traders' open interest and large hedging and speculation in the Canadian dollar, Swiss franc, British pound, and Japanese yen futures markets. The results, based on Granger-causality tests and vector autoregressive models, suggest that small traders' open interest is closely related to large speculators' open interest. Small traders and speculators tend to herd, which means that small traders are long [short] when speculators are long [short] as well. Moreover, small traders and speculators are positive feedback traders whereas hedgers are contrarians. Regarding information flows, speculators lead small traders in three of the four currency futures markets. The results therefore suggest that small traders ares mall speculators who follow the large speculators, indicating that they are less well informed than the large speculators.

Suggested Citation

  • Carl Chiarella & Andreas Rothig, 2010. "Small Traders in Currency Futures Markets," Research Paper Series 278, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:278
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp278.pdf
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    Cited by:

    1. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predictability of crypto returns: The impact of trading behavior," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    2. Егорова Людмила Геннадьевна, 2014. "Эффективность Торговых Стратегий Мелких Трейдеров," Проблемы управления, CyberLeninka;Общество с ограниченной ответственностью "СенСиДат-Контрол", issue 5, pages 34-41.
    3. 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.
    4. Dirk G. Baur & Lee A. Smales, 2022. "Trading behavior in bitcoin futures: Following the “smart money”," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1304-1323, July.
    5. Hung, Jui-Cheng & Liu, Hung-Chun & Yang, J. Jimmy, 2021. "Trading activity and price discovery in Bitcoin futures markets," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 107-120.
    6. Hossfeld, Oliver & Röthig, Andreas, 2016. "Do speculative traders anticipate or follow USD/EUR exchange rate movements? New evidence on the efficiency of the EUR currency futures market," Finance Research Letters, Elsevier, vol. 18(C), pages 218-225.
    7. Lee A. Smales, 2022. "Trading Behavior in Agricultural Commodity Futures around the 52-Week High," Commodities, MDPI, vol. 1(1), pages 1-15, June.
    8. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predicting inflation expectations: A habit-based explanation under hedging," International Review of Financial Analysis, Elsevier, vol. 89(C).

    More about this item

    Keywords

    currency futures; small traders; speculation; hedging;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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