Futures Price Variability: A Test of Maturity and Volume Effects

A number of previous studies have examined the contemporaneous relation between asset price variability and volume traded. For example, Clark (1973), Cornell (1981), and Tauchen and Pitts (1983) have investigated this relation for futures markets and Epps and Epps (1976), Harris (1984a, 1984b), and Smirlock and Starks (1984) for the stock market. Underlying this empirical research is a theoretical framework that suggests that price variability (or the absolute change in prices) and volume traded should be positively correlated. According to this theoretical framework, the so-called mixture of distributions hypothesis (MDH),1 the correlation between price variability and volume should be positive because of joint dependence on a common directing variable or event. This study uses contract disaggregated data on futures prices to obtain evidence on the relation between price variability and volume of trading. Strong positive contemporaneous correlations between trading volume and price volatility are documented consistent with the mixture of distributions hypothesis. It is concluded that maturity is not a suitable surrogate for the common directing variable. Specifically, while maturity has a strong effect on volume, no such relation is found for price variability. Finally, while in the majority of cases price variability and trading volume are contemporaneously correlated, there are a significant number of cases in which a sequential relation appears to be present. * An earlier version of this paper was presented at the 1984 meeting of the European Finance Association in Manchester, England, and at Southern Methodist University, the University of Wisconsin-Madison, Duke University, McGill University, and the University of Toronto. We wish to thank the seminar participants and an anonymous referee from this Journal for constructive comments and criticism. All remaining errors are, of course, our responsibility. We would also like to thank the Columbia Center for the Study of Futures Markets and the Interactive Data Corp. for providing some of the data used in the study. 1. See Clark 1973; and Harris 1984a, 1984b.