Trading activity in the equity market and its contingent claims: An empirical investigation
Abstract
Little is known about the joint dynamics of volume across the various contingent claims on the equity market. We study the time-series of trading activity in the cash S&P 500 index and its derivatives (options, the legacy and E-mini futures contracts, and the ETF), and consider their dynamic relation with the macroeconomy, over more than 3000 trading days during 1997–2009. Legacy futures volume has trended downward while other series have trended upward. Total futures volume has increased, suggesting that the trading in the legacy contract has been at least partially supplanted by trading in the E-mini contract. All series are highly cross-correlated and jointly dependent. Signed and absolute trading activity in contingent claims (most prominently, options) predicts shifts in aggregate state variables such as the short interest rate, and the term and credit spreads, as well as signed and absolute returns around major macroeconomic announcements. Overall, consistent with the informational role of options, their volume innovations have the strongest forecasting ability for fluctuations in the macroeconomic environment.
Additional Information
© 2014 Elsevier. Received 9 April 2013, Revised 26 May 2014, Accepted 27 May 2014, Available online 5 June 2014. We are grateful to an anonymous referee and Christian Wolff (the editor) for insightful and constructive feedback, We also thank Tony Bernardo, Rajna Gibson Brandon, Bhagwan Chowdhry, Riccardo Colacito, Stuart Gabriel, Nickolay Gantchev, Mark Garmaise, Diego Garcia, Xiaohui Gao, Bob Geske, Grace Hu, Petko Kalev, Sergio Mayordomo, Anh Le, Tse-Chun Lin, Christian Lundblad, Krishna Paudyal, Juan Ignacio Peña, Adam Reed, Bill Reese, Pedro Saffi, Suherman, Dragon Tang, Geoff Tate, Kam-Ming Wan, Joakim Westerholm, participants at the conference on "Liquidity and Arbitrage Trading" organized by the University of Geneva, in seminars at University of North Carolina (Chapel Hill), University of Hong Kong, Comision Nacional del Mercado de Valores, Universidad Carlos III, University of Strathclyde, Gadja Mada University, University of South Australia, UCLA and the Hans Stoll retirement conference at Vanderbilt University, for valuable comments.Additional details
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- CaltechAUTHORS:20190426-145910190
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