An investigation of the relationship between bond market volatility and trading activities: Korea treasury bond futures market

Abstract

This study proposes a new proxy variable for the speculative trading activities in the analysis of relationship between volatility and trading activities. With the new variable, the dynamic interaction among underlying bond market volatility, futures trading volume, open interest and speculation ratio in Korea treasury bond and futures markets is examined under the vector autoregressive analysis (VAR) framework. A positive relationship is found between the bond market volatility and the speculation ratio. The result implies that the new variable could be a good candidate, reflecting the speculative trading activities in derivative markets.

Notes

See Karpoff (1987) and Mayhew (2000) for a review of previous studies on this topic.

Various period moving averages have been experimented with to compute the volume and open interest metrics. The empirical results are similar but not reported here.

Both variables are raw data before the transformation in Equation 1.