A0826
Title: Speculation and volatility: A time-varying approach applied on Chinese commodity futures markets
Authors: Claudia Wellenreuther - University of Muenster (Germany) [presenting]
Jan Voelzke - University of Muenster (Germany)
Abstract: There is an ongoing discussion and a lot of empirical investigations on, whether or not, speculative activity increases volatility on commodity futures markets. However, relatively little empirical research has been conducted to analyze the role of speculators on Chinese commodity futures markets, mostly due to a missing standard measure for speculative activity. Additionally, most of the existing studies assume the potential effects to be constant over a long period of time. We address both shortcomings and empirically investigate the time-varying influence of speculative activity on returns volatility in Chinese futures markets for commodities. To measure speculative activity a speculation ratio, defined as trading volume divided by open interest, is used. We sequentially apply two time-varying VAR models with stochastic volatility to six heavily traded metal and agricultural futures contracts to show how the relationship between returns volatility and the speculation ratio evolves over time. We analyze Granger causality as well as impulse responses. Eventually, we find no evidence for an effect from speculative activity on volatility. On the contrary, for most commodities, return volatility seems to amplify speculation.
