Volatility and trading activity following changes in the size of futures contracts

Johan Bjursell, Alex Frino, Yiuman Tse, George H K Wang*

*Corresponding author for this work

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

This paper has two purposes. First, we examine the relationship between daily price volatility and trading activity one year before and after a change in contract size by examining the results of contract splits in the Australian share price index futures and the U.K. FTSE-100 futures contracts and a reverse contract split in the Australian Bank Bill Acceptance futures contract. Second, we evaluate the effect of the change in contract size on the use of the particular futures market. We find that after a contract size change, the change in total trading frequency has the power to explain the change in daily price volatility. Specifically, after a contract split, trading frequency increased, resulting in increased daily price volatility, and vice versa after a reverse contract split. Most of the average trade size variable has an immaterial impact on price volatility. However, decomposing the total trading frequency into four trade size classes, we find that the trading frequency for small and large trade size categories are highly significant in explaining changes in daily price volatility after the contract splits. Finally, we find the change in contract size for each futures market was successful because within three years following the change, the adjusted trading volume and open interest surpassed the levels prior to the change and have continued to increase thereafter.

Original languageEnglish
Pages (from-to)967-980
Number of pages14
JournalJournal of Empirical Finance
Volume17
Issue number5
DOIs
Publication statusPublished - Dec 2010

Keywords

  • Futures contract size
  • Price volatility
  • Success and failure of futures contracts
  • Trade size
  • Trading frequency

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