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Resources Policy: Beyza Mina Ordu-Akkaya, Ecenur Ugurlu-Yildirim, Ugur Soytas
Resources Policy: Beyza Mina Ordu-Akkaya, Ecenur Ugurlu-Yildirim, Ugur Soytas
Resources Policy
journal homepage: www.elsevier.com/locate/resourpol
The role of trading volume, open interest and trader positions on volatility
transmission between spot and futures markets
⁎
Beyza Mina Ordu-Akkayaa, , Ecenur Ugurlu-Yildirimb,c, Ugur Soytasc,d
a
Social Sciences University of Ankara, Department of Business Administration, Hükümet Meydanı No: 2 06030, Altındağ, Ankara, Turkey
b
Ankara Yıldırım Beyazıt University, Department of International Trade and Business, Esenboğa Külliyesi, 06970 Esenboğa, Ankara, Turkey
c
Middle East Technical University, Department of Business Administration, 06531 Ankara, Turkey
d
Middle East Technical University, Department of Earth System Science, 06531 Ankara, Turkey
A R T I C LE I N FO A B S T R A C T
JEL codes: In this paper, we investigate the role of open interest, trading volume and trading positions of trader groups on
Q02 volatility spillover between futures and spot markets of two major commodities; oil and gold during the last two
Q40 decades. The initial analysis including only spot and futures markets imply that the relationship is bi-directional
G12 for crude oil, and uni-directional for gold. Though, including open interest and trading volume enrich our results
Keywords: indicating open interest and spot markets are closely connected and trading volume provide cross-market in-
Commodity formation, which might suggest investors investing in both commodities make these markets informationally
Spillover connected. Given the increasing presence of institutional investors in commodity markets during the sample
Open interest
period, we also check whether speculators lead to excess volatility in futures market as financialization pro-
Trading volume
ponents argue. Findings depict that actually the spillover is from futures market to speculators’ positions im-
Speculators
Financialization plying volatility in commodity markets is not attributable to speculators in the last two decades.
1. Introduction and a review of literature Glück, 2015). Financialization proponents statistically show specific
type of traders’ positions (money managers, swap dealer, producer etc.)
The debate on the role of futures market leading to excess volatility Granger-cause futures prices and volatilities (e.g. Stoll and Whaley,
in spot markets, dates back to 19th century with the introduction of 2010) and Hong and Yogo (2012) show trading volume and open in-
futures market in major commodities. Therefore studies examining the terest are highly informative on commodity returns, as well. Therefore,
linkage between futures and spot prices have been highly crucial in the we investigate the role of trading volume, open interest and different
last century (Jacks, 2007). This discussion has got even deeper after the types of traders’ positions on the link between spot - futures prices of two
heavy influx of institutional investors to commodity markets, which are major commodities, gold and oil.
referred to as financialization of commodity markets in the literature Our research paper mainly has three stages of analysis. In the first
(Cheng and Xiong, 2014). US Commodity Futures Trading Commission stage, we include solely spot and futures markets in our analysis and
(CFTC) (2008) present that institutional holdings in oil futures dis- examine the interaction between them. Cheng and Xiong (2014) state
played a dramatic increase from USD 13 billion in 2003 to over USD commodity futures market affects commodity prices through three
200 billion in 2008. This increase can be attributed to two main ad- mechanisms. The first and major mechanism asserts that there is an
vantages of commodities; low correlation with traditional financial intrinsic storage or consumption decision in commodities. If market
assets and hedging opportunities against inflation (Ordu et al., 2017). players opt for storing, believing prices would get higher in the future, a
Even though some argue financialization is a passing trend which link between futures and commodity market is generated (Kaldor,
temporarily increases connections between markets (e.g., Fattouh et al., 1939; Working, 1949; Brennan, 1958). The second mechanism is risk
2013), others contend it is a permanent phenomenon (Adams and sharing, which argues that market players share the commodity price
⁎
Corresponding author.
E-mail address: beyza.akkaya@asbu.edu.tr (B.M. Ordu-Akkaya).
https://doi.org/10.1016/j.resourpol.2018.02.005
Received 1 December 2017; Received in revised form 29 January 2018; Accepted 7 February 2018
0301-4207/ © 2018 Elsevier Ltd. All rights reserved.
Please cite this article as: Ordu-Akkaya, B.M., Resources Policy (2018), https://doi.org/10.1016/j.resourpol.2018.02.005
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Fig. 1. Crude oil and gold prices. Fig. 1 presents the historical spot prices of crude oil (CSPOT) and gold (GSPOT). Crude oil prices are represented by the left and gold by the right axis.
risk via commodity futures market (Keynes, 1923; Hicks, 1939). The positions2 for crude oil and gold and investigate the role of these po-
last mechanism is information discovery which argues futures markets sitions on volatility spillover between spot and futures markets. Basak
aggregate information (weather, demand/ supply, inventory, economic and Pavlova (2016) theoretically show that the presence of institutional
cycles, and business conditions etc.) and incorporate this information in investors increase the volatility of storable commodities. Under absence
futures prices of each commodity. Hence, first of all, we investigate the of institutions, prices are mainly determined through supply and de-
volatility spillover between futures and spot markets of two highly mand risks, whereas with the inflow of institutions a new type of risk
traded commodities; crude oil and gold markets. These commodities are emerges; which is ‘falling behind the index’. This risk contends that
the main representatives of the large commodity markets (Zhang and institutional investors strive to match the performance of the index,
Wei, 2010).1 Therefore, information transmission between the spot and since inflow to their institution is dependent upon how much they
futures markets of these major commodities is of utmost importance to surpass index levels. And this risk increases volatility for commodity
traders and investors. To address this area, we do not only check the markets. However, recent studies point out that results depend on the
spillover between gold and crude oil's own spot and futures markets, commodity market in question (Gozgor et al., 2016; Adams and Glück,
but also cross-market spillovers. As one can note from the historical 2015). Hence, we check whether this is the case for crude oil and gold
price plot of these commodities in Fig. 1, they display similar fluctua- during our sample period.
tions over time. Even though several studies check the spillover be- The contribution of our paper is mainly two-folds. First of all, we
tween gold and crude oil (e.g., Baffes, 2007; Narayan et al., 2010; utilize a rather new but intuitive methodology developed by Diebold
Zhang and Wei, 2010; Ewing and Malik, 2013), they do not consider and Yilmaz (2012). This method does not only take the dynamic aspect
cyclical changes in the economic environment. Although some papers of spillovers into account, but also shows the “net” direction of spil-
find significant spillovers (Adams and Glück, 2015) and some do not lover. Even if statistically there might be spillover in both directions, we
(Brunetti et al., 2016), our methodology will shed more light on this can identify which asset is the net transmitter of volatility. A market
issue by considering time-varying characteristics of the last two dec- may switch roles from being a net volatility transmitter/receiver to a
ades. net receiver/transmitter over time. We also attempt to capture this role
In the second stage, following Hong and Yogo (2012) we include switching behavior. Secondly, we do not solely check the spillover
open interest and trading volume information of both commodities. between futures and spot markets, which is already a very rich litera-
Traders should consider not only heterogeneous expectations and nu- ture; but we include new phenomenon of financialization into our
merous information, but also trading activities of new groups of in- study. Moreover, the idea that open interest and trading volume in-
vestors. Trading activities, especially volume and open interest has corporate more information on future prices than any other variable is
been on the radar of researchers for a long while. Several studies check rather new (Hong and Yogo, 2012). Therefore, through this way, we
spillovers between selected energy asset classes (e.g.,Gormus et al. aim to enrich established literature on spot-futures market nexus and
(2014)) or geographical markets (e.g., Kocaarslan et al., 2017). How- newly growing literature on financialization of commodities.
ever, not many include trading volume or open interest in commodity The major empirical findings of our study are as follows. The primary
market analysis. Since, Hong and Yogo (2012) show that open interest analysis between futures and spot markets show that the relationship is
helps to predict not only commodity returns, but also business cycles bi-directional for crude oil, and uni-directional for gold. Moreover, gold is
and macroeconomic environment; we also include such variables. a more internally oriented commodity and seems to have its own dy-
Therefore, in the next step of our analysis we examine the role of namics. We also find that open interest and spot markets are significantly
trading volume and open interest on leading to volatility in futures and connected. Furthermore, trading volume provides cross-market informa-
spot markets. Given the increasing interest of institutional investors in tion, which might be implying investors investing in both crude oil and
commodity markets, these liquidity variables may contain important gold markets make these markets informationally connected. Finally, we
information regarding the price and risk dynamics in these markets. find that positions of all traders and commodity markets are closely in-
The heavy flood of institutional investors in commodity markets terconnected. Speculators, particularly, do not lead to increased volati-
further heated the debate on the impact of transaction quantities by lities in futures market. In fact, spillover seems to work in opposite di-
different trader groups on the futures/spot markets. Hence, in the third rection. Similarly, gold money manager positions are net volatility
stage of our analysis we employ weekly disaggregated data on trader receivers throughout the sample period, whereas crude oil money man-
ager positions sometimes become a net transmitter. The change in roles
could be attributable to the change in the price of commodities.
1
Gold is an important precious metal that is viewed as safe haven during the times of
crises by both individual and institutional investors and gold stock is worth around USD 9
trillion (Erb and Harvey, 2013). Similarly, crude oil is a very significant commodity not
2
only as an energy input but also as an investment tool. The investment in commodity Following the public commentary (CFTC, 2006), CFTC decided to publish
trading strategies grew from USD 13 billion in 2003 to USD 317 billion in July 2008 Disaggregated Commitments of Traders (DCOT) reports, which provide weekly positions
(Masters, 2008). of swap dealers, money managers and producers.
2
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Table 1
Descriptive statistics and correlation matrix for daily analysis.
Panel A
Panel B
Panel C
CFUT 1.00
CFUTOI 0.11 1.00
CFUTV 0.09 0.21 1.00
CSPOT 0.97 0.11 0.10 1.00
GFUT 0.34 −0.01 −0.16 0.32 1.00
GFUTOI −0.01 0.01 0.02 −0.01 0.00 1.00
GFUTV 0.01 0.24 0.54 0.02 −0.15 0.22 1.00
GSPOT 0.32 −0.04 −0.20 0.29 0.96 −0.01 −0.21 1.00
This table gives descriptive statistics for the first part of the analysis (Daily). Data is available in daily frequency and for the period between 25 August 1997 and 17 October 2017 for all
variables. Panel A presents statistics of variables in levels. Panel B shows GARCH (1,1) volatilities of same variables. CFUT and GFUT are continuous futures prices of crude oil and gold,
respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold bullion price per ounce. CFUTOI (GFUTOI) and CFUTV (GFUTV) are open
interest positions of crude oil (gold) and trading volume, respectively. Trading volume is the total quantity of contracts traded and open interest is the number of contracts outstanding at
the end of each trading day. Panel C presents correlation matrix of selected variables.
Our results provide important policy-making implications. First of autoregression method of Sims (1980) and forecast error variance de-
all, we show that futures markets do not lead to excess volatility in spot composition (FEVD). FEVD investigates the contribution of each vari-
markets. Therefore, unlike the common perception in public about fu- able on forecasting the H -step ahead variance on itself or another
tures market (Jacks, 2007), it is not an evil market and thus policy- variable. So, FEVD provides one to analyze the percentage share of
makers do not necessarily be worried about the impact of futures on variance of gold spot prices on crude oil prices. One should note that DY
spot markets. Second, open interest and trading volume might in- employs generalized frameworks (Koop et al., 1996; Pesaran and Shin,
formation about crude oil and gold. There is no harm for policy-makers 1998) but not the traditional method using Cholesky-decomposition.
to share the information on trading volume and open interest, since Cholesky-decomposition urges the user to order variables upon the
although these two provide information about the market, they do not importance of the impact on other variables. However, one might not
increase the volatility. Last but not least, our results imply that futures always be equipped with this information. Hence, generalized frame-
market do not harm small investors via speculations, since speculators work covers this issue and allows the user to include variables in-
do not increase volatility. This result is in line with Brunetti et al. dependent from ordering.
(2016) who claim that speculators do not lead to increased volatilities First, the analysis runs a 4-lag3 vector autoregression based on SIC
in futures market; but the opposite is true. Therefore, policy-makers do criterion with N -number of variables as in Eq. (1). Based on the number
not need to interfere specific markets or market-players as unlike al- of endogenous variables, coefficient matrices are [N *N ]; and εt is the
leges in literature. In fact, sharing such information increases the error term and is a vector of independent and identically distributed
transparency and would benefit public, even more. disturbances as (0, Σ).
The paper is organized as follows. Second and third sections present
4
the empirical method and data, respectively. Results are displayed in
the following section. The final section concludes.
Yt = ∑ θi Yt−i + εt
i=1 (1)
3
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Table 2
Descriptive statistics and correlation matrix for weekly analysis.
Panel A
L-CFUT L-CMM L-CPU L-CSD L-CSPOT L-GFUT L-GMM L-GPU L-GSD L-GSPOT
Panel B
CFUT CMM CPU CSD CSPOT GFUT GMM GPU GSD GSPOT
Mean 0.05 0.04 0.06 0.03 0.05 0.03 0.06 0.06 0.05 0.02
Median 0.04 0.04 0.06 0.03 0.05 0.02 0.06 0.06 0.05 0.02
Maximum 0.14 0.11 0.07 0.03 0.19 0.04 0.16 0.11 0.10 0.05
Minimum 0.02 0.04 0.05 0.02 0.03 0.02 0.05 0.03 0.04 0.02
Std. Dev. 0.02 0.01 0.00 0.00 0.02 0.00 0.01 0.02 0.01 0.00
Skewness 1.56 5.21 1.32 −6.08 2.81 1.70 2.96 0.58 0.98 1.76
Kurtosis 6.12 43.94 5.66 67.64 14.71 5.86 15.30 2.93 3.84 5.96
Observations 591 591 591 591 591 591 591 591 591 591
Panel C
CFUT CMM CPU CSD CSPOT GFUT GMM GPU GSD GSPOT
CFUT 1.00
CMM 0.07 1.00
CPU 0.09 0.36 1.00
CSD −0.05 −0.03 0.05 1.00
CSPOT 0.95 0.05 0.08 −0.03 1.00
GFUT 0.39 0.07 0.09 −0.18 0.45 1.00
GMM 0.09 0.46 0.16 0.06 0.08 0.07 1.00
GPU 0.39 −0.05 0.11 −0.01 0.31 −0.12 0.02 1.00
GSD 0.13 0.11 −0.03 0.00 0.06 0.05 0.22 0.25 1.00
GSPOT 0.37 0.07 0.08 −0.24 0.41 0.99 0.07 −0.13 0.04 1.00
This table gives descriptive statistics for the second part of the analysis (Weekly). Data is available in weekly frequency and for the period between 27 June 2006 and 17 October 2017 for
all variables. Panel A presents statistics of variables in levels. Panel B shows GARCH (1,1) volatilities of same variables. Panel C presents correlation matrix. CFUT and GFUT are
continuous futures prices of crude oil and gold, respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold bullion price per ounce.
CMM (GMM), CSD (GSD) and CPU (GPU) are weekly open interest positions of Money Managers, Swap Dealers and Producers, respectively. Since all these traders have both long and
short positions, we compute open interest via (long +short +2*spreading) for the first two groups and via (long +short) for producers. Spread positions are simultaneous buying and
selling and are valid for speculators.
∞
to 1 and thus each entry is normalized by the row sum as follows;
Yt = ∑ Ai εt−i
i=0 (2) ∼ δij
δij = N
or more simply Yt = A (L) ut . Moving average coefficients denoted by ∑ j = 1 δij (4)
A (L) is of utmost importance in understanding the dynamic links be- N N
By construction, = 1 and moreover
∑ j = 1 δij = N . Now, we
∑i, j = 1 δij
tween variables. These coefficients allow dividing the H -step-ahead
are equipped with available measures to calculate gross and net spil-
forecast error variances of each variable into parts attributable to the
lovers. The gross connectedness is basically the off-diagonal entry and is
various system shocks. There are hundreds of moving average coeffi-
as follows for the spillover from i to j and j to i , respectively.
cients to interpret (i.e., A (L) = A0 + A1 L+A2 L + …,) , but variance de-
N ∼ N ∼
composition framework transforms them to a readable format. ∑ j = 1 δij ∑ j = 1 δji
Then the FEVD for H-step ahead is as follows: GSi ← j = *100; GSi → j = *100
N N (5)
H −1
σjj−1 ∑h = 0 (e′i Ah Σej )2 Next, one can compute the net spillover, which is;
δij = H −1
∑h = 0 (e′i Ah ΣA′h ei )2 (3) NSij = GSj ← i − GSi ← j. (6)
where σjj stands for the standard deviation of εj , Σ is the covariance Diebold and Yilmaz (2012) also compute a spillover index, which is
matrix for the error vector, ej is a selection N *1 vector with j -th element basically a measure of the extent of spillover. To compute the spillover
unity and zeroes otherwise. As a result, a N *N matrix is produced, of index, we sum all off-diagonal elements and divide it by total column or
which each entry provides the contribution of variable j on the forecast row sums including the diagonal elements. Therefore the denominator
error variance of variable i . In the matrix, diagonals and off-diagonals is always N *100 .
present own contributions (variable i to itself) and pairwise-contribu- N ∼
∑i, j = 1, i ≠ j δij
tions (variable i to variable j ), respectively. However, row sums in TSi ← j =
N *100 (7)
generalized variance decomposition matrices are not necessarily equal
4
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Table 3
Volatility spillover between futures and spot markets.
CFUT
CSPOT 0.5
GFUT −0.4 −0.3
GSPOT −0.5 −0.2 1.9
CFUT
CSPOT 0.2
GFUT 0.3 0.2
GSPOT 0.1 0.1 0.5
This table presents the volatility spillover tests utilizing Diebold and Yilmaz (2012) framework. Panel A shows the gross spillover findings. The percentage in the below right hand corner
of the table is the spillover index and shows the share of spillovers in explaining forecast error variance of all assets, on average. It is the grand off-diagonal sum divided to the grand sum
including diagonals, expressed as a percentage. Contribution to others and from others figures are off-diagonal column and row sums, respectively. Panel B depicts the net (pairwise)
spillovers between each pair. One can find the directional spillover via deducting same pairs’ gross spillovers from each other. For instance the net spillover is [43.1–42.6 = 0.5] between
oil futures and spot markets. Positive (Negative) figure shows spillover from column (row) to row (column). CFUT and GFUT are continuous futures prices of crude oil and gold,
respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold bullion price per ounce.
5
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
and also increase prices and volatilities. Hence, we also investigate the
volatility transmission mechanism between open interest positions of
trader types and commodity prices. We obtain open interest positions
for sub-groups of traders; which are Swap Dealers, Money Managers
and Producers starting from 2006. As its name suggests, DCOT report
provides weekly disaggregated data on trader positions beginning from
2006 for almost all commodities.
This report divides trading positions mainly into four as; Swap
Dealers, Processors, Managed Money and Other Reportables. Swap
dealers are often affiliated with large financial institutions and are the
counterparty of swap transactions (CFTC, 2008). Money Managers in-
clude fundamentally hedge funds, commodity trading advisors and
commodity pool operators which are included in futures trading on
behalf of their clients. Therefore they manage investments of either
Fig. 3. Volatility index for oil and gold spot and futures markets. The figure presents institutional or individual clients. Processors and Merchants, on the
the volatility spillover index between CFUT, GFUT, CSPOT and GSPOT for the period other hand, is the core commercial group participating in producing,
between 25 August 1997 and 17 October 2017. Since Diebold and Yilmaz (2012) advise it processing or handling of commodities. Swap dealers and Money
to be calculated via 200-day rolling windows. Managers are generally on the long side of the market, whereas
Table 4
Volatility spillover including trading volume and open interest.
CFUT CFUTOI CFUTV CSPOT GFUT GFUTOI GFUTV GSPOT From others
CFUT 53.1 1.1 0.4 41.7 2.2 0.4 0.3 1.1 46.9
CFUTOI 1.6 95.2 0.1 1.0 0.5 0.3 1.2 0.1 4.8
CFUTV 1.2 1.0 94.1 0.7 0.0 0.1 2.7 0.3 5.9
CSPOT 42.0 1.1 0.5 53.7 1.6 0.3 0.2 0.6 46.3
GFUT 1.5 0.1 0.0 1.1 57.3 2.7 1.8 35.7 42.7
GFUTOI 0.3 0.3 0.2 0.3 5.3 87.0 2.6 4.1 13.0
GFUTV 0.0 0.1 3.9 0.0 1.8 1.3 92.2 0.6 7.8
GSPOT 0.5 0.0 0.1 0.4 38.0 2.6 1.1 57.3 42.7
Contribution to others 47.2 3.6 5.1 45.1 49.4 7.6 9.7 42.4 210.2
Contribution including own 100.3 98.9 99.2 98.8 106.6 94.6 102.0 99.7 26.3%
CFUT
CFUTOI 0.57
CFUTV 0.84 0.83
CSPOT 0.38 0.06 −0.24
GFUT −0.62 −0.44 0.03 −0.51
GFUTOI −0.07 0.06 0.07 −0.03 2.62
GFUTV −0.22 −1.02 1.15 −0.21 0.08 −1.27
GSPOT −0.59 −0.06 −0.16 −0.26 2.37 −1.48 0.49
This table gives the spillovers including both crude oil and gold futures/ spot markets and trading volume/ open interest. The
percentage in the below right hand corner of the table is the spillover index and shows the share of spillovers in explaining forecast
error variance of all assets, on average. It is the grand off-diagonal sum divided to the grand sum including diagonals, expressed as a
percentage. Contribution to others and from others figures are off-diagonal column and row sums, respectively. Panel B depicts the net
(pairwise) spillovers between each pair. One can find the directional spillover via deducting same pairs gross spillovers from each
other. For instance the net spillover is [42.0–41.7 = 0.4] for oil futures and spot markets. Positive (Negative) figure shows spillover
from column (row) to row (column). CFUT and GFUT are continuous futures prices of crude oil and gold, respectively. CSPOT is the
spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold bullion price per ounce. CFUTOI (GFUTOI) and
CFUTV (GFUTV) are open interest positions of crude oil (gold) and trading volume, respectively. Trading volume is the total quantity
of contracts traded and open interest is the number of contracts outstanding at the end of each trading day.
6
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
7
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Fig. 5. Time-varying net spillovers. This figure gives time-varying net spillover of each variable against other variables. We calculate time-varying spillover via 200-day rolling
windows. CFUT and GFUT are continuous futures prices of crude oil and gold, respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot
gold bullion price per ounce. CFUTOI (GFUTOI) and CFUTV (GFUTV) are open interest positions of crude oil (gold) and trading volume, respectively. Trading volume is the total quantity
of contracts traded and open interest is the number of contracts outstanding at the end of each trading day.
8
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
9
B.M. Ordu-Akkaya et al. Resources Policy xxx (xxxx) xxx–xxx
Table 5
Volatility spillover based on trader types.
CFUT CMM CPU CSD CSPOT GFUT GMM GPU GSD GSPOT From others
CFUT 49.5 0.0 0.5 0.4 44.2 2.2 0.0 0.1 0.5 2.7 50.5
CMM 0.6 83.8 12.2 2.6 0.4 0.1 0.1 0.1 0.1 0.0 16.2
CPU 0.3 14.8 83.6 0.9 0.2 0.1 0.0 0.1 0.1 0.0 16.4
CSD 1.7 1.9 0.9 91.8 1.3 0.1 0.0 1.5 0.1 0.6 8.2
CSPOT 43.6 0.1 0.5 0.3 50.2 2.2 0.0 0.1 0.5 2.7 49.8
GFUT 2.5 0.1 0.0 0.0 2.2 47.2 2.7 0.5 1.2 43.8 52.8
GMM 0.2 0.1 0.0 0.0 0.1 5.5 81.1 3.7 4.0 5.2 18.9
GPU 0.5 0.2 0.1 1.7 0.6 1.1 3.3 90.0 1.1 1.6 10.0
GSD 0.9 0.1 0.1 0.1 0.7 2.4 4.0 1.4 88.1 2.3 11.9
GSPOT 2.7 0.1 0.0 0.2 2.3 42.9 2.3 0.6 1.1 47.7 52.3
Contribution to others 52.9 17.3 14.3 6.1 52.0 56.6 12.4 8.0 8.5 58.9 286.9
Contribution including own 102.4 101.1 97.9 98.0 102.2 103.7 93.5 98.0 96.6 106.5 28.70%
CFUT CMM CPU CSD CSPOT GFUT GMM GPU GSD GSPOT
CFUT
CMM 0.6
CPU −0.2 2.5
CSD 1.4 −0.6 0.0
CSPOT −0.6 −0.3 0.3 −1.0
GFUT 0.3 0.0 −0.1 −0.1 0.0
GMM 0.2 0.0 0.0 0.0 0.1 2.9
GPU 0.4 0.1 −0.1 0.2 0.5 0.6 −0.5
GSD 0.4 0.0 0.1 0.0 0.3 1.2 0.0 0.3
GSPOT 0.0 0.1 0.0 −0.4 −0.4 −0.9 −2.9 −1.0 −1.1
This table presents the volatility spillover between crude oil and gold futures and spot markets and their trader types. The
percentage in the below right hand corner of the table is the spillover index and shows the share of spillovers in explaining
forecast error variance of all assets, on average. It is the grand off-diagonal sum divided to the grand sum including diagonals,
expressed as a percentage. Contribution to others and from others figures are off-diagonal column and row sums, respectively.
Panel B depicts the net (pairwise) spillovers between each pair. CFUT and GFUT are continuous futures prices of crude oil and
gold, respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold bullion
price per ounce. CMM (GMM), CSD (GSD) and CPU (GPU) are weekly open interest positions of Money Managers, Swap Dealers
and Producers, respectively.
receiver role from futures market prices and other traders’ positions. 2016). Moreover, the increasing presence of institutional investors in
However, when the market is on contango, they might prefer to exit commodity markets changed the commodity market fundamentals such
from the market since they are not rewarded for the risk they are as prices, volatility significantly. Therefore, the link between spot and
bearing. After they commence to exit, this behavior could be leading futures markets could structurally change following the financializa-
the volatility in futures market prices and in positions of other traders. tion. To examine the role of trading volume, open interest and trader
positions on volatility spillover, we mainly employ Diebold and Yilmaz
(2012) method. This technique is critically advantageous over other
5. Conclusions spillover tests since it helps one to understand the direction and time-
varying characteristics of spillover.
The goal of our paper is to investigate the role of trading volume, Our results can be summarized as follows. First of all, our findings
open interest and trader positions on volatility spillover between fu- show that futures and spot markets have almost equal spillover impact
tures and spot markets of two commodities; crude oil and gold. on the other, and hence no market is more dominant on the other. This
Although the linkage between futures and spot markets is a rich lit- result is in line with the assertion that spot and futures market impound
erature, including liquidity variables such as trading volume and open information immediately, and no market is more dominant on the other
interest as well as traders’ positions are rather new (Antonakakis et al.,
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Fig. 8. Volatility network including trader types. Panel A – Gross spillovers. Panel B – Net spillovers. We present the volatility network between oil and gold markets based upon
Diebold-Yilmaz output. First we compute gross spillovers between Asset i and Asset j and take an average of these spillovers. If the average spillover is greater than 1 (which means
contribution of shocks in one of the assets to the others’ FEV is at least 1%), there is a significant spillover between these assets. If the net spillover is greater than 1
(NSij = GSj ← i − GSi ← j .), then we plot a uni-directional arrow, otherwise bi-directional arrow. Dashed line refers to the cross-commodity spillover and straight line refers to spillovers
between same commodity markets. CFUT and GFUT are continuous futures prices of crude oil and gold, respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per
barrel and GSPOT is the spot gold bullion price per ounce. CMM (GMM), CSD (GSD) and CPU (GPU) are weekly open interest positions of Money Managers, Swap Dealers and Producers,
respectively.
(e.g., Alquist and Kilian, 2010; Nicolau and Palomba, 2015). Even positions have always been volatility receivers during the sample
though, there are various studies showing gold and oil markets are period, crude oil money managers do not present such behavior. This
closely connected, results are dependent upon the sample period, result resonates well with the related literature suggesting that fi-
methodology employed etc. Our analyses indicate that while the re- nancialization of the commodity is dependent on the performance of
lationship between futures markets is bi-directional in oil and gold that specific commodity with respect to the S&P GSCI (e.g., Adams and
markets, for spot market it is not, possibly due to the spillover effect of Glück, 2015).
speculators who invest only in futures market. Such bi-directional re- These findings suggest that policy-makers do not need to put addi-
lationship is further proven by Ewing and Malik (2013). tional control mechanisms over speculators since they do not increase
Extending the analysis via daily trading volume and open interest of volatilities in futures market. Moreover, trading volume and open in-
both futures markets, we find that there is a close relationship between terest disclose information about the market, but they do not lead to an
open interest and spot markets. Furthermore, trading volume provides excess volatility. As a matter of fact, sharing such information would
cross-market information, which might be implying investors investing increase the transparency of the market. As a future direction of re-
in crude oil and gold markets spill information to one another. This search, researchers could examine cointegrating relationship between
finding partially resonates with Antonakakis et al. (2016); however we abovementioned variables and for other selected group of commodities.
should note that trading volume and open interest do not spill volatility Since previous studies show financialization is dependent upon the
to futures or spot markets as it is argued in Hong and Yogo (2012). commodity (Gozgor et al., 2016; Ordu et al., 2017), results could sig-
Lastly, we conduct tests to examine the role of hedge funds, swap nificantly change for other commodities. Moreover, we do not parti-
dealers and producers’ positions on future-spot markets nexus. We find cularly examine underlying behavior for time-varying spillover indices
evidence that positions of all traders and commodity markets are clo- in our paper. One could look whether particular economic conditions,
sely interconnected as financialization proponents argue (Basak and business cycle or changes in trader behavior affects spillover char-
Pavlova, 2016). Money manager positions of oil and gold are closely acteristics.
linked, and their traders significantly spill volatility to the other market.
Time-varying spillover findings display that while gold money manager
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Fig. 9. Time varying net spillovers This figure gives time-varying net spillover of each variable against other variables. We calculate time-varying spillover via 200 rolling windows.
CFUT and GFUT are continuous futures prices of crude oil and gold, respectively. CSPOT is the spot US dollar prices of WTI Cushing Oklahoma per barrel and GSPOT is the spot gold
bullion price per ounce. CMM (GMM), CSD (GSD) and CPU (GPU) are weekly open interest positions of Money Managers, Swap Dealers and Producers, respectively.
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