Relationship between returns volatility and trading activity: Evidence from Chinese non-ferrous metals futures market

Abstract

As one of the largest non-ferrous metals futures trading markets, Chinese non-ferrous metals futures market plays an important part in the world. However, research based on Chinese futures market of the price-volume relation is rather sparse. This paper studies the relation between returns volatility and trading activity of copper and aluminum futures in Chinese non-ferrous metals futures market on the basis of mixture distribution hypothesis. In addition, we divide the daily volatility of futures market into overnight volatility and trading volatility to distinguish between international market and local market. To discriminate between the impact of the market trends and of innovation on returns volatility, we also divide trading activity into expected and unexpected part on the basis of Gallant et al. and Bessembinder et al. The results show that the returns volatility increases when the trading is frequent, whereas it decreases when open interest increases. Furthermore, the trading activity and international market have a greater influence on aluminum futures than on copper futures.