A Bivariate Generalized Autoregressive Conditional Heteroscedasticity-in-Mean Study of the Relationship between Return Variability and Trading Volume in International Futures Markets

19 Pages Posted: 25 Jun 2007

See all articles by Michael Jacobs

Michael Jacobs

Accenture Consulting

Joseph I. Onochie

Zicklin School of Business, Baruch College CUNY

Date Written: December 31, 1997

Abstract

The relationship between trading volume and price changes in futures markets continues to be of interest mainly due to the inconclusive nature of the results reported so far in the literature (Karpoff, 1987). One source of controversy centers on the empirical distribution of futures price changes (Sterge, 1989).A recent study by Najand and Yung (1991) concludes that price changes in U.S. Treasury bond futures markets are best characterized by a time series model that allows for generalized autocorrelation as well as conditional heteroscedasticity (GARCH) in the second moments. Using this GARCH framework, Najand and Yung (1991) document a positive relationship between price variability and trading volume, consistent with both the mixture of distributions hypothesis (Clark, 1973), several se-quential equilibrium models of speculative markets (Copeland, 1976), and certain newer classes of noisy rational expectations equilibria (Blume, Easley, and O'Hara, 1994; Easley, Keifer, and O'Hara, 1994). This paper extends Najand and Yung's (1991) study in two ways. First, a cross-section of international futures markets is examined. A study of international futures markets is important because it provides independent verification of the results obtained in domestic markets. Second, a bivariate exponential GARCH(1,1)-in-mean model is used. In ad-dition to allowing for autocorrelation in the first and second moments, this model has the advantages of avoiding simultaneity bias with regard to the effect of volume on price volatility, allowing for nonlinearities in the second moments, as well as providing a means for estimating a risk premium.

Keywords: Futures Markets, Interest Rates, GARCH, Volume

JEL Classification: G13, E43, B23

Suggested Citation

Jacobs, Michael and Onochie, Joseph I., A Bivariate Generalized Autoregressive Conditional Heteroscedasticity-in-Mean Study of the Relationship between Return Variability and Trading Volume in International Futures Markets (December 31, 1997). Available at SSRN: https://ssrn.com/abstract=996317 or http://dx.doi.org/10.2139/ssrn.996317

Michael Jacobs (Contact Author)

Accenture Consulting ( email )

1345 Avenue of the Americas
New York, NY 10105
United States
9173242098 (Phone)

Joseph I. Onochie

Zicklin School of Business, Baruch College CUNY ( email )

17 Lexington Avenue
Dept. of Economics and Finance
New York, NY 10010
United States
212-802-6380 (Phone)
212-802-6353 (Fax)

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