by Mohammad Syful Hoque
This dissertation examines if futures trading activities affect the volatility of the underlying commodity over the period of 1997 to 2012. The investigation is conducted on agricultural commodities traded at the spot and futures market in the USA. The tests are conducted on a single commodity level. The futures volume series has been decomposed into predictable (information-less) and unpredictable (information-driven) components to see their effect on volatility. GARCH & EGARCH models are estimated with these two explanatory volume variables. Information-less future Trading volume is seen to have a negative and significant coefficient, indicating its stabilizing effect on spot volatility. On the other hand, the information driven volume is found to be significant and positive suggesting destabilizing effect on spot volatility. Multiple Endogenous Structural Break tests in both the return (mean) and the variance series are also examined. After adjusting the structural break in the EGARCH model it is found that there is no sign of leverage effect but both volumes still have instantaneous effect on spot volatility. Based on the theoretical investigation it is found that speculators trading activity can be approximated by trading volume. Through a number of information hypotheses it is also found that there is an intertwined relation among trading activities, information and volatility. The empirical results support that speculators’ trading activities tend to increase the volatility. So, it is concluded that futures trading do affect the underlying volatility and speculators are the market participants that affect volatility the most.