Trading Activity in the Equity Market and Its Contingent Claims: An Empirical Investigation

55 Pages Posted: 10 Dec 2010 Last revised: 31 Mar 2012

See all articles by Richard Roll

Richard Roll

California Institute of Technology

Eduardo S. Schwartz

Simon Fraser University (SFU); University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Date Written: March 26, 2012

Abstract

Little is known about the joint dynamics of volume across the various contingent claims on the equity market. We study the time-series of trading activity in the cash S&P 500 index and its derivatives (options, the legacy and E-mini futures contracts, and the ETF), and consider their dynamic relation with the macroeconomy, over more than 3000 trading days during 1997-2009. Legacy futures volume has trended downward while other series have trended upward. Total futures volume has increased, suggesting that the trading in the legacy contract has been at least partially supplanted by trading in the E-mini contract. All series are highly cross-correlated and jointly dependent. Signed and absolute trading activity in contingent claims (most prominently, options) predicts shifts in aggregate state variables such as the short interest rate, and the term and credit spreads, as well as signed and absolute returns around major macroeconomic announcements. Overall, consistent with the informational role of options, its volume innovations have the strongest forecasting ability for fluctuations in the macroeconomic environment.

Keywords: volume, market efficiency

JEL Classification: G12, G14

Suggested Citation

Roll, Richard W. and Schwartz, Eduardo S. and Subrahmanyam, Avanidhar, Trading Activity in the Equity Market and Its Contingent Claims: An Empirical Investigation (March 26, 2012). Available at SSRN: https://ssrn.com/abstract=1722932 or http://dx.doi.org/10.2139/ssrn.1722932

Richard W. Roll

California Institute of Technology ( email )

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Eduardo S. Schwartz

Simon Fraser University (SFU) ( email )

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University of California, Los Angeles (UCLA) - Finance Area ( email )

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National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

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

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