Volatility, open interest, volume, and arbitrage: evidence from the SP 500 futures market

Using a vector autoregressive (VAR) approach, the dynamic interactions and causal relationships among volatility, open interest, trading volume and arbitrage opportunities in the S&P 500 index futures market is examined. It is found that increased volatility lowers pricing error. This implies that as market volatility increases, investors sell off their equity and futures positions with relatively larger drops in futures prices. Pricing error plays a critical role in linking implied volatility and the level of open interest. Open interest rises for a few days in response to a pricing error shock, but pricing error declines over the next day after an initial rise in response to an innovation in open interest. This suggests that the level of open interest is a good proxy for examining the capital flows into and out of the nearest S&P 500 index futures contract.
Publisher
ROUTLEDGE
Issue Date
2002-05
Language
ENG
Keywords

PRICE VOLATILITY; STOCK VOLATILITY; TRADING ACTIVITY

Citation

APPLIED ECONOMICS LETTERS, v.9, no.6, pp.369 - 372

ISSN
1350-4851
DOI
10.1080/13504850110074155
URI
http://hdl.handle.net/10203/4285
Appears in Collection
KGSF-Journal Papers(저널논문)
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