Volatility and Trading Activity Following Changes in the Size of Futures Contracts

30 Pages Posted: 3 Feb 2008

See all articles by Johan Bjursell

Johan Bjursell

Credit Suisse AG

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Yiuman Tse

University of Texas at San Antonio - College of Business

George H. K. Wang

George Mason University - Department of Finance

Date Written: March 21, 2007

Abstract

This paper examines the relationship between daily price volatility and trading activity one year before and after a change in the size of selected futures contracts. The following three contracts are included in this study: the Stock Price Index traded on the Sydney Futures Exchange (SFE), which had a contract split on October 11, 1993; the FTSE-100 index traded on the London International Financial Futures Exchange (LIFFE), which had a contract split on March 23, 1998; and the 90-Day Bank Acceptance Bill (BAB) traded on the SFE, which had a reverse split on May 1, 1995. We obtain several interesting empirical results. We observe that there is a positive relationship between daily price volatility and the number of trades (trading frequency) before and after a change in the size of the examined futures contracts. We find that the increase (decrease) in total trading frequency has the power to explain the increase (decrease) of daily price volatility after a contract split (reverse split). Most of the average trade size variable has an immaterial impact on price volatility. Decomposing the total trading frequencies into four trade size classes, we find that the trading frequencies for small and large trade size categories are highly significant in explaining changes in daily price volatility after the index futures contracts' splits. These results are consistent with the noise trading hypothesis (Black (1986)) and the hypothesis on less informed trading in index futures markets. For the BAB case, we find that the trading frequencies for small, medium and large sizes impact price volatility before and after the reverse contract split.

Keywords: : Price volatility, Trading Frequency, Trade Size, Change in Size of Futures Contracts.

JEL Classification: G10

Suggested Citation

Bjursell, Carl and Frino, Alex and Tse, Yiuman and Wang, George H. K., Volatility and Trading Activity Following Changes in the Size of Futures Contracts (March 21, 2007). Available at SSRN: https://ssrn.com/abstract=1087123 or http://dx.doi.org/10.2139/ssrn.1087123

Carl Bjursell

Credit Suisse AG ( email )

CRTI 4
P.O. Box
Zurich, CH-8070
Switzerland

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Yiuman Tse

University of Texas at San Antonio - College of Business ( email )

Department of Finance
San Antonio, TX 78249
United States
210-458-5314 (Phone)

George H. K. Wang (Contact Author)

George Mason University - Department of Finance ( email )

Fairfax, VA 22030
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
193
Abstract Views
1,429
rank
171,316
PlumX Metrics