Trading Activity and Intraday Returns in the Interest Rate Futures

Abstract

This paper studies intraday returns and variations in trading activity in the interest rate futures traded on London International Financial Futures Exchange. The intraday volume exhibits a significant asymmetric response of volume to price changes. This relationship is dynamic as the direction of asymmetry is reversed through out the trading day. Equity markets are known to exhibit an asymmetric effect, although the effect is static. The asymmetric volume-price relationship in equity market is primarily attributed to the short sale constraint, which imparts a positive correlation between volume and signed price changes. The empirical evidence on futures markets suggests that daily volume and price changes are uncorrelated. Since the short sale constraint is absent in futures, an asymmetric volume-return relation in futures has been ruled out. This paper presents evidence on a dynamic asymmetric relation in interest rate futures. The paper also provides an alternative explanation of the dynamic asymmetric relation that arises out of the joint action of scalpers, day traders, and position traders as they formulate their trading strategies.

Note: Previously titled "Volume Response to Price Changes in the Interest Rate Futures"