Market volatility and the demand for hedging in stock index futures

The effect of net positions by type of trader on volatility in foreign currency futures markets

“…Small traders do not significantly respond to volatility. We differ from the Chang et al (2000) study by focusing on the relation between changes (in either direction) in net positions and volatility, and are able to test dispersion of beliefs models and noise trading theories in the futures context. Daigler and Wiley (1999) examined the relation between return volatility and trading volume categorized by market makers, clearing members, floor traders, and the general public for five financial futures contracts at the Chicago Board of Trade.…”

“…Studies related to this paper include Chang, Pinegar, and Schachter (1997), Chang, Chou, and Nelling (2000), and Daigler and Wiley (1999). Chang et al (1997) found a positive relation between speculative trading volume and price volatility in the S&P 500 index, Treasury bonds, gold, corn, and soybean futures markets.…”

“…Ederington and Lee (2001) found that while "noncommercials" in the heating oil futures market represent speculators, the "commercials" group includes some traders with no known positions in the cash/forward markets. Nevertheless, this interpretation has been widely used in the literature (Bessembinder, 1992;Chang et al, 2000;Chang et al, 1997;De Roon, Nijman, & Veld, 2000). 1986De Long et al, 1990), which results in a similar volume-volatility relationship to those predicted by dispersion of beliefs models.…”

“…This suggests that both a positive and a negative shock in net positions of hedgers are associated with a decrease in volatility, however, the effect of a positive shock on volatility is smaller than that of a negative shock. Our results differ from those of Chang et al (2000), who found that the level of long and short positions of hedgers increase with stock market volatility, and the opposite is true for speculators and small traders. The difference may be because their study uses long and short positions as contrasted with the net positions in this paper.…”

“…Chang et al (1997) found a positive relation between speculative trading volume and price volatility in the S&P 500 index, Treasury bonds, gold, corn, and soybean futures markets. Chang et al (2000) reported a positive relation between price volatility and (long/short) hedging positions, but a negative relation between volatility and (long/short) speculative positions in the S&P 500 index futures market. Small traders do not significantly respond to volatility.…”