An Empirical Analysis Of The Relation Between Daily Liquidity And Volatility In Shanghai Copper Futures Market

This paper explores the daily liquidity and volatility of the copper futures marketsfrom SFE (Shanghai Futures Exchange) and an empirical analysis is given. Firstly, wegive an economic definition of the futures markets liquidity. We reviewed manyliteratures about the liquidity in security and future markets. Secondly, based on theprior, a new idea of the futures markets is proposed. So a study from macrostructureand microstructure of futures markets is developed. In macrostructure, liquiditysymbolizes the activity of the trading. In microstructure, it represents the ability ofquick and low-cost trading.In this paper, daily volume and liquidity ratio are the measurement of the interdayliquidity. Daily volume measures the liquidity from macrostructure. Liquidity ratiomeasures the ability of trading from microstructure;also reflect the variety of thetrade cost, waiting time and trade price. The estimator from GK equation measures thevolatility. From empirical analysis, we find that estimator from GK equation issuperior to the estimator from GARCH modelsThen the paper studies the relationship between the markets liquidity and volatility intheory. We make use of the MDH (Mixture Distribution Hypothesis) theory, whenmaking a analysis of the relationship between trade volume and volatility. And basedon the prior literatures, a new model is developed to study the relationship betweenliquidity ratio and volatility. Also the empirical research supports the MDH theory.There is a positive relation between the trade volume and volatility. So a conclusionthat positive relation between the liquidity and volatility is made from macro level.There is no relation between the liquidity ratio and volatility, so we think there is norelationship between the liquidity and volatility from micro level. The empiricalresearch confirms two meaning. On one hand, the asset liquidity risk premium doesnot exist for the relation between the liquidity and volatility. On the other hand, theopposite of price volatility is not suit for measuring the width of the liquidity. Becausethe width can measure the volatility and there is no relation between the liquidity andvolatility, the spread could not measure the liquidity -strong or weak.Also a strong relation between trade volume and liquidity ratio is detected by testingthe expected volume, unexpected volume and liquidity ratio in terms of MDH. So it iscorrect that we use the expected volume instead of the liquidity volume in theory.