Asymmetric Volume-Return Relation and Concentrated Trading in LIFFE Futures

36 Pages Posted: 13 May 2008

See all articles by Tribhuvan Puri

Tribhuvan Puri

University of Massachusetts Dartmouth - Department of Accounting & Finance

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration

Abstract

This study demonstrates that intraday volume and return on LIFFE interest rate and currency futures exhibit an asymmetric volume-return relationship characterised by significantly larger volume associated with negative returns than with non-negative returns. This finding is unlike the stylised asymmetric relation often observed in equity markets, where the volume on price rise is larger than the volume on price decline. The asymmetric relationship in LIFFE futures is also found to be dynamic as the direction of asymmetry can reverse during the day. It has been argued in the past that a costly short sale restriction that requires a higher transaction cost on a short position than on a long position is responsible for the asymmetric effect in equity markets. Since such a restriction is absent in futures markets, they should not exhibit any asymmetric volume behaviour. Based on the results of this research, the costly short sale hypothesis is rejected. An alternative explanation of the asymmetric relation observed in futures is presented based on recent information models that take into consideration asymmetrically-informed traders, their dispersion of beliefs, quality and quantity of the information signal, and how the traders process it. The paper also confirms a strong U-shape trading pattern in 15-minute volume, but no such pattern is identified in intraday returns.

Suggested Citation

Puri, Tribhuvan and Philippatos, George C., Asymmetric Volume-Return Relation and Concentrated Trading in LIFFE Futures. European Financial Management, Vol. 14, Issue 3, pp. 528-563, June 2008. Available at SSRN: https://ssrn.com/abstract=1132533 or http://dx.doi.org/10.1111/j.1468-036X.2007.00396.x

Tribhuvan Puri (Contact Author)

University of Massachusetts Dartmouth - Department of Accounting & Finance ( email )

285 Old Westport Road
N Dartmouth, MA 02747-2300
United States
508-999-8426 (Phone)

George C. Philippatos

University of Tennessee, Knoxville - College of Business Administration ( email )

432 Stokely Management Center
Knoxville, TN 37996-0570
United States
(865) 974-1719 (Phone)

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