Impacts of Speculation and Hedging on Chinese Stock Index Futures Volatility
Abstract
This study emphasizes on the relation between speculation/hedging and volatility in index futures market in China. To gauge the impact of speculation and hedging, the speculation ratio and hedging ratio are applied. A general view on impact of speculation and hedging on returns volatility is analysed. The increase of speculation will lead to the increase of return volatility, and hedging may have a stabilizing effect on the volatility. From the variance decomposition, speculation and hedging can only explain a slight part of volatility but speculation can explain a much larger part than hedging. Also, volatility can explain a larger part of speculation than hedging, which means that volatility has a larger influence on speculation than on hedging. Results suggest that the speculation affects index futures markets and the results may have implications for the market participants and governing authorities.