Implications of futures trading volume: Hedgers versus speculators

Abstract

The high trading volume in securities markets has puzzled researchers for years. Recently, overconfidence models have offered testable implications to address the puzzle. In this study, we proved empirically that investors have different degrees of overconfidence in trading securities. Using information in the Commitments of Traders reports of the Commodity Futures Trading Commission to differentiate between hedgers and speculators, we find relatively strong and consistent evidence of overconfident trading among futures speculators only. There are four major findings in our results. First, speculators trade more (less) aggressively following gains (losses) in futures markets. Second, speculators trade more (less) aggressively following gains (losses) of related stocks in the stock market. Third, gains (losses) of less-related stocks, however, do not affect the trading of futures speculators. Finally, it is found that overconfident futures speculators assume more (less) risk following market gains (losses). Given that overconfident investors tend to overestimate investment returns, our findings may have important implications for investors in zero-sum financial markets.