Relationships between Stock Price Volatility and Futures Volume in Taiwan

Abstract

The purpose of this paper is to examine the relationship between stock price and futures volume. This paper contributes to previous studies of price-volume relationship and the determinants of futures volume by postulating three hypotheses and testing them with data for four stock index futures in Taiwan. The model developed in this article formalizes the price-volume relationship by stochastic calculus and Ito process. First, we find a long-run relationship between stock price and futures volume by cointegration test. If the cointegarted relationship exists, stock price and futures volume are non-stationary in level but stationary in the first differences. That is, stock price and futures volume follow a random-walk process. On the other hand, we extract the short-run and long-run impacts by vector error correction model. Furthermore, we consider three measures for stock price volatility to test the determinants of change and volatility of futures volume. Although the determinant of change and volatility of futures volume are sensitive to the volatility estimate used, we find that absolute stock price change is a more suitable measure for stock index price volatility.