RELATIONSHIP BETWEEN RETURN, VOLATILITY AND TRADING ACTIVITY: EVIDENCE FROM TURKISH DERIVATIVES EXCHANGE ISE-30 INDEX FUTURES CONTRACTS
Bulmus, Inci Cisil (2011)
Kuvaus
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Tiivistelmä
This study examines the relationship between return, volatility and trading activity of ISE-30 Index Futures Contracts in Turkish Derivatives Exchange in the context of information based models and heterogeneous beliefs of investors, by gathering daily observations of each series from September 2005 through September 2010. The data was obtained from Turkish Derivatives Exchange database. The approaches applied in this thesis are Glosten Jagannathan and Runkle Generalized Autoregressive Conditional Heteroscedasticity (GJR-GARCH) and Vector Autoregression (VAR) analysis.
The present study describes the theory and implementation of methodology for testing the contemporaneous and causal relations between return, volatility and trading activity. First, finding of the positive correlation between trading volume and absolute value of price change is supported by Mixture of Distribution Hypothesis, Rational Expectations and Differences of Opinion Models. Second, causal relation in either direction between trading volume and returns suggests that trading volume adds predictive power in the presence of current and past returns or vice versa. Third, negligible reduction is obtained in the persistence of volatility by the inclusion of lagged trading volume into conditional variance equation by proposing that trading volume is not a good proxy for ISE-30 Index Futures market. Fourth, the evidence of causality for volume-volatility relationship in either direction suggests a feedback system for ISE-30 Index Futures. On one step further, lagged values of volatility (trading volume) have an ability to predict current trading volume (volatility). However, there is no such effect for the volume – open interest relation since the causality only runs from volatility to open interest. Finally, the existence of positive correlation and causality between trading volume and return volatility refers that new information is disseminated sequentially to traders as
suggested by Sequential Information Arrival Hypothesis.
The present study describes the theory and implementation of methodology for testing the contemporaneous and causal relations between return, volatility and trading activity. First, finding of the positive correlation between trading volume and absolute value of price change is supported by Mixture of Distribution Hypothesis, Rational Expectations and Differences of Opinion Models. Second, causal relation in either direction between trading volume and returns suggests that trading volume adds predictive power in the presence of current and past returns or vice versa. Third, negligible reduction is obtained in the persistence of volatility by the inclusion of lagged trading volume into conditional variance equation by proposing that trading volume is not a good proxy for ISE-30 Index Futures market. Fourth, the evidence of causality for volume-volatility relationship in either direction suggests a feedback system for ISE-30 Index Futures. On one step further, lagged values of volatility (trading volume) have an ability to predict current trading volume (volatility). However, there is no such effect for the volume – open interest relation since the causality only runs from volatility to open interest. Finally, the existence of positive correlation and causality between trading volume and return volatility refers that new information is disseminated sequentially to traders as
suggested by Sequential Information Arrival Hypothesis.