Relation between Open Interest and Volatility in Commodities Markets

Abstract

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The purpose of this paper is to examine the consequence of open interest on volatility of futures markets. This paper emphasises on investigating the relation between open interest and the commodities futures. An effort was made to capture the size and change in speculative behaviour in futures markets by examining the behaviour of futures prices due to open interest. The findings show that the depth of market has an effect on the futures market’s volatility, but the direction of this effect depends on the type of contract. The sample includes daily data covering the period 2010-2020 from the Indian commodities futures markets (including crude oil futures). A two-stage methodology was employed by the authors: first, the authors investigate the relation between open interest and volatility. Next, the authors employ the E-GARCH model and considers the asymmetric response of volatility to shocks of different signs. Finally, the authors consider a regression framework to scrutinise the contemporaneous relationships between open interest and futures prices (volatility).

Keywords: Futures, Commodities, E-GARCH, Volatility, Open Interest

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