Volatility–volume co-movements: evidence from China metal markets

Ren Zhang and Arnold Polanski

Applied Economics, 2016, vol. 48, issue 45, 4312-4336

Abstract: This article investigates the interactional relationship between price volatility and futures trading activity for three heavily traded metal products on the Shanghai Metal Exchange and the Shanghai Futures Exchange. Using models based on vector autoregression and generalized method of moments, we show, in particular, that futures trading activity has a strong impact on both spot and futures price volatility in copper and aluminium markets. Futures trading activity leads spot market volatility in copper and aluminium markets which suggests that futures markets have a destabilizing effect. In order to disentangle the effect of different traders’ types on asset price movements, we decompose futures trading into speculators’ and hedgers’ trading and investigate their contributions to volatility. As a robustness check, we investigate the impact of endogenous structural breaks on the interactional relationship between price volatility and futures trading.

Date: 2016
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DOI: 10.1080/00036846.2016.1156235

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