Volatility–volume relationship of Chinese copper and aluminum futures market

Abstract

Abstract Following Bessembinder and Seguins, trading volume is separated into expected and unexpected components. Meanwhile, realized volatility is divided into continuous and discontinuous jump components. We make the empirical research to investigate the relationship between trading volume components and various realized volatility using 1 min high frequency data of Shanghai copper and aluminum futures. Moreover, the asymmetry of volatility–volume relationship is investigated. The results show that there is strong positive correlation between volatility and trading volume when realized volatility and its continuous component are considered. The relationship between trading volume and discontinuous jump component is ambiguous. The expected and unexpected trading volumes have positive influence on volatility. Furthermore, the unexpected trading volume, which is caused by arrival of new information, has a larger influence on price volatility. The findings also show that an asymmetric volatility–volume relationship indeed exists, which can be interpreted by the fact that trading volume has more explanatory power in positive realized semi-variance than negative realized semi-variance. The influence of positive trading volume shock on volatility is larger than that of negative trading volume shock, which reflects strong arbitrage in Chinese copper and aluminum futures markets.