Abstract
Using the methodology devised by Bessembinder Seguin, the relationships between volatility on the one hand and volume and market depth in the South African futures market are examined. Daily mark-to-market prices, trading volumes and open interest on six futures contracts traded on SAFEX over the period 1990 to 1994 are utilized. The evidence suggests that linking price volatility to total volume does not capture all information. When total volume is divided into expected and unexpected components, the latter is shown to have a more substantial effect on volatility. Furthermore, coefficients pertaining to open as well as unexpected open interest tend to be negative, implying that lower volatility shocks are associated with a given volume in deeper markets. It is further shown that positive unexpected volume shocks are associated with higher levels of volatility and that asymmetry exists, insofar as positive shocks have larger effects on volatility than negative shocks.
Highlights
It has become conventional wisdom to state that a positive contemporaneous correlation exists between volume traded and price volatility in financial markets. Karpoff ( 1987) referenced 18 separate studies which had documented this relationship in a variety of financial markets
In event studies the validity of tests can depend on the joint distribution of price changes and volume and third, the price-volume relation is critical in the debate about the distributions of speculative prices
There are significant correlations bemost volatile contract is that on the All Gold Index (GLDI) tween absolute returns and volumes in only two cases, which with a standard deviation of return equal to just more than is in contrast to the US evidence provided by Bessembinder
Summary
It has become conventional wisdom to state that a positive contemporaneous correlation exists between volume traded and price volatility in financial markets. Karpoff ( 1987) referenced 18 separate studies which had documented this relationship in a variety of financial markets. Kyle ( 1985), defining depth as the volume of unanticipated order flows required to move prices by one unit, has developed a model which implies that larger volumes support more informed traders According to this model depth varies with the level of noninformational trading activity. Two of these correlation coeffitions and partial autocorrelations for returns, absolute returns, cients are significantly negative pointing towards negative volume and open interest for each of the six contracts. There are significant correlations bemost volatile contract is that on the All Gold Index (GLDI) tween absolute returns and volumes in only two cases, which with a standard deviation of return equal to just more than is in contrast to the US evidence provided by Bessembinder. Correlated with trading volumes in each of the eight markets analysed
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