Trading Volume and Price Volatility Relationship in Asian Commodity-Futures Markets

Abstract

     This study investigates the causal relationship between trading volume and price volatility of liquid futures contracts in some selected commodity Asian markets; Agricultural Futures Exchange of Thailand (AFET), Bursa Malaysia Derivatives (BURSA), Dalian Commodity Exchange (DALIAN) and Tokyo Commodity Exchange (TOCOM). The most liquid contracts during 2007 and 2008 of each market was used for this research; ribbed smoked rubber sheet (RSS) contract of AFET and also TOCOM, crude palm oil (CPO) contract of BURSA and non-genetically modified soybean, or soybean No.1 (1SB) contract of DALIAN. Based on 5 percent level of significance, Granger causality test and impulse response analysis indicate that there are unidirectional causality from price volatility to trading volume in both markets; AFET and TOCOM, bi-directional causality in DALIAN. Price volatility is a slight dominant factor for explaining trading volume in those three markets. However, the volume and the volatility are independent in BURSA. The study also suggests policy implication to enhance market liquidity in AFET by two suggestions. Firstly, Thai government should let agricultural product prices moved freely. Price sanction should be as least as possible. Lastly, AFET can provide trading knowledge directly to potential farmers or farmer groups. Hence, they can use price mechanism in AFET for their price risk-management purpose.