Volume Progression and Price–Volume Relationship of Commodity Futures: Case of Bullion and Base Metals

Abstract

Purpose: The purpose of this study is to examine the behaviour of trading volumes in commodity futures markets over the life of the contract and to analyse the relationship between changes in price, volume and open interest. Methodology: The volume progression is examined by dividing the life of a futures contract to six phases and analysing how the volumes picked up during each phase. The relationship between price, volume and open interest was examined using the Pearson correlation and the vector autoregression (VAR) model. Findings: It is found that the volumes in commodity futures are clustered around the last phase of the contract’s life. As far as the relationship between price, volume and open interest is concerned, there is a very low correlation between the variables. Price is not influenced by volume or open interest. The volume changes are found to be influenced by open interest, and the open interest is influenced by its own past values. Practical Implications: The findings of the study have implications for traders in the commodity futures market as well as policymakers as it throws light on the crucial issue of lack of volumes in the futures market. Contribution/Originality: The study contributes to the literature in terms of analysis of volume progression, which is not researched extensively in the Indian market. The findings of the study, which contradict the findings of other similar studies, open up scope for further research.