Liquidity and Trading Activity on a New Futures Market: The Thailand Futures Exchange (TFEX)

34 Pages Posted: 25 Jan 2010 Last revised: 26 Aug 2010

See all articles by Lars L. Norden

Lars L. Norden

Stockholm University - Stockholm Business School

Date Written: August 25, 2010

Abstract

In April, 2006, the newly established Thailand Futures Exchange (TFEX) launched the SET 50 index futures contract as its first traded product. The launch provides this study with a unique opportunity to investigate the development of liquidity and trading activity on an emerging futures market. The joint dynamics of different dimensions of liquidity and trading activity is analyzed over the exchange’s first 3.5 years of operation using a vector autoregressive (VAR) framework. Results show a considerable increase in liquidity, with larger order book depth, and an increase in trading activity during the futures market’s infant years. The VAR analysis reveals evidence of significant bi-directional causation between; (i) the two dimensions of futures market liquidity, the bid-ask spread and order book depth, (ii) futures trading activity and volatility, (iii) futures liquidity (width and depth) and the information flow to the futures market (through trading activity and volatility). Information shocks to volatility affect futures market liquidity, which in turn affect volatility even further. Although shocks are persistent, the effects wear off within a few trading days, indicating that the TFEX is a viable futures market even in its youth.

Keywords: Futures; Liquidity, Bid-Ask Spread, Depth, Volatility, Trading Activity, Causality

JEL Classification: G13

Suggested Citation

Nordén, Lars L., Liquidity and Trading Activity on a New Futures Market: The Thailand Futures Exchange (TFEX) (August 25, 2010). Available at SSRN: https://ssrn.com/abstract=1542026 or http://dx.doi.org/10.2139/ssrn.1542026

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

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