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Investor behavior and volatility of futures market: A theory and empirical study based on the OLG model

Frontiers of Business Research in China volume 5, pages 512–536 (2011)Cite this article

Abstract

Investor trading behaviors are always an important issue in behavioral finance and market supervision. This study examines the relationship between investor behavior and future market volatility. We first introduce a two-period OLG model into the futures market, and develop an investor behavior model based on future contract price. We then extend the model to two scenarios: complete and incomplete information. We provide the equilibrium solution, and develop two hypotheses, which are tested with cuprum tick data in Shanghai Futures Exchange (SHFE). Empirical results show that the two-period OLG model for future market is consistent with the market situation in China. More specifically, investors with sufficient information such as institutional investors usually adopt the contrarian trading strategy, whereas investors with insufficient information, e.g., individual investors, usually adopt the momentum trading strategy. These findings reveal that investor behaviors in the Chinese futures market are different from those of in the Chinese stock market.

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Authors and Affiliations

  1. Center for Non-Traditional Security Studies, Hubei Key Research Institute of Humanities and Social Science, Huazhong Unversity of Science & Technology, Wuhan, 430074, China

    Yun Wang & Zongcheng Zhang

  2. School of Finance, Nanjing University of Finance & Economics, Nanjing, 210037, China

    Renhai Hua

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  1. Yun Wang
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  2. Zongcheng Zhang
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  3. Renhai Hua
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Correspondence to Yun Wang.

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Wang, Y., Zhang, Z. & Hua, R. Investor behavior and volatility of futures market: A theory and empirical study based on the OLG model. Front. Bus. Res. China 5, 512–536 (2011). https://doi.org/10.1007/s11782-011-0143-2

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