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

Wang, Changyun (2001): The effect of net positions by type of trader on volatility in foreign currency futures markets. Published in: Journal of Futures Markets , Vol. 22, No. 5 (May 2002): pp. 427-450.

Abstract

We investigate the effect of net positions by type of trader on return volatility in six foreign currency futures markets using the weekly Commitments of Traders (COT) data. When net positions are decomposed into expected and unexpected components, we find that expected net positions by type of trader generally do not co-vary with volatility. However, volatility is positively associated with shocks (in either direction) in net positions of speculators and small traders, and negatively related to shocks (in either direction) in net positions of hedgers. This evidence suggests that changes in speculative positions destabilize the market. Consistent with dispersion of beliefs models and noise trading theories, hedgers appear to possess private information, whereas speculators and small traders are less informed in these markets.

• Item Type: MPRA Paper
• Language: English
• Keywords: Foreign currency exchange futures; return predictability
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

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