Abstract
Trading activities represent the flow of market information to the investors. This paper examines the effect of trading activities, i.e., trading volume and open interest, on the volatility of return for Malaysian Crude Palm Oil Futures. The GARCH model is applied by adding the expected and unexpected elements of trading activities (trading volume and open interest) as the independent variables. The results show that there is a negative contemporaneous relationship between the expected volume and volatility, but that a positive relationship exists between unexpected volume and volatility. On the contrary, the expected and unexpected open interest mitigate the volatility. Therefore, both trading volume and open interest should be considered together when information flows into the market.
Highlights
Introduction and the Volatility ofReturn onThe mixture of distribution hypothesis (MDH) suggested by Clark (1973) and the sequential information arrival hypothesis (SIAH) suggested by Copeland (1976) have been widely used to document the relationship between price changes and trading volume.According to Ezzat and Kirkulak-Uludag (2016), MDH assumes that all market participants receive new information simultaneously and reach a new price equilibrium immediately without partial equilibrium
SIAH assumes that new information is disseminated to market participants one at a time, such that a sequence of partial equilibrium is achieved prior to a new price equilibrium (Karpoff 1987)
This paper extends the MDH and SIAH frameworks by adding both trading volume and open interest to examine the volatility of return on the Malaysian Crude Palm Oil
Summary
Introduction and the Volatility ofReturn onThe mixture of distribution hypothesis (MDH) suggested by Clark (1973) and the sequential information arrival hypothesis (SIAH) suggested by Copeland (1976) have been widely used to document the relationship between price changes and trading volume.According to Ezzat and Kirkulak-Uludag (2016), MDH assumes that all market participants receive new information simultaneously and reach a new price equilibrium immediately without partial equilibrium. SIAH assumes that new information is disseminated to market participants one at a time, such that a sequence of partial equilibrium is achieved prior to a new price equilibrium (Karpoff 1987). This means that the return volatility and trading activities are not correlated contemporaneously because there is a lead–lag relationship between return volatility and trading activities. Both price and volume changes are due to the uncertainty of information flows into the market
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