The Impact of Trader Type on the Futures Volatility-Volume Relation

Authors

  • Robert T. Daigler,

    1. Florida International University
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  • Marilyn K. Wiley

    1. Florida Atlantic University
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    • Florida International University and Florida Atlantic University, respectively. We thank the reviewer and the editor, René Stulz, for insightful comments and suggestions concerning the concepts and exposition of this article. We also thank Peter Alonzi, David Dubofsky, Michael Fishman, Tony Herbst, Craig Hiemstra, Thomas Kelly, Scott Lee, Paul Pfleiderer, Terrance Skantz, Howard Sorkin, George Tauchen, and Pradeep Yadav for helpful discussions on this topic, and Terry Pactwa for conversion of the mainframe data tapes. Part of this research was completed when the first author was a Visiting Scholar at the University of Strathclyde, Scotland. This research is partially sponsored by a grant from The Chicago Board of Trade Foundation. Earlier versions of this paper were presented at the 1996 Western Finance meetings, Sun River, Oregon; the 1996 Chicago Board of Trade Spring Research Seminar; the 1995 European INQUIRE (Institute for Quantitative Research in Finance—Q-Group) meetings in Barcelona, Spain; and the 1995 Financial Management Meetings in New York. Remaining errors are ours alone.

ABSTRACT

We examine the volatility-volume relation in futures markets using volume data categorized by type of trader. We find that the positive volatility-volume relation is driven by the general public, a group of traders who are distant from the trading floor and therefore without precise information on order flow. Clearing members and floor traders who observe order flow often decrease volatility. Our findings are consistent with Shalen's (1993) hypothesis that uninformed traders who cannot differentiate liquidity demand from fundamental value change increase volatility.

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