FIA Releases Futures Volatility Study

Terry Flanagan

The Futures Industry Association has released an empirical study on changes in the level of volatility in the futures markets. The study focused on 15 futures contracts listed on four leading futures exchanges—CME Group, Eurex, IntercontinentalExchange and NYSE Liffe.

The study found that prices in these 15 markets moved through cycles of high and low volatility as well as numerous price spikes attributable to macro-economic events.

The study found, however, that volatility attributable to structural factors did not change in most of these contracts. In other words, innovations such as algorithmic and high-frequency trading do not appear to have affected the volatility of prices.

“The pace of innovation in the futures markets has been nothing short of remarkable,” said Robert Whaley, director of the Financial Markets Research Center at Vanderbilt University’s Owen Graduate School of Management. “Where 10 or 15 years ago, most trading took place in the pits, today the lion’s share is executed electronically at speeds that would not have been imagined in days of old. Yet our research has shown that intraday volatility has not been affected by these changes. Trading is certainly faster than it used to be, but there is no evidence this has caused volatility to increase.”

The study was conducted by Whaley and Nicolas Bollen, a professor in finance at Vanderbilt University’s Owen Graduate School of Management. The study was facilitated by FIA and sponsored by the four exchanges in order to better understand the impact of structural change on market quality.

“The futures markets have evolved dramatically over the last decade or so, and some people have expressed the view that these changes have caused market quality to deteriorate,” said Walt Lukken, president and chief executive officer of FIA. “We decided that the best way to address this concern would be to analyze the empirical data to see if there have been any structural impacts on volatility.”

The study identifies two benchmarks for intraday volatility that can be used to assess the impact of micro-structural changes on intraday volatility while controlling for changes in the rate of information flow. The first is the use of implied volatility in equity index options markets and comparing that to realized volatility. The second involved computing return volatility over different holding periods and measuring changes in the relative magnitude of volatility.

In both cases, the analysis found that the volatility measured by these benchmarks did not change through time for most of the 15 contracts that were examined. The exception was the four contracts listed on Eurex, but the increase in volatility occurred only in 2011—the last year of the sample period—and is likely due to the liquidity problems caused by the Euro crisis rather than changes in market structure.

Taken together, these results indicate that there is no evidence to suggest that realized return volatility in electronically-traded futures markets has changed through time, at least with respect to the fifteen contract markets that were examined.

“We now have empirical evidence that volatility in the futures markets has neither increased nor decreased once the effects of macro-economic shocks are removed,” said Lukken. “We thank the exchanges for their support for this research and we hope this study will contribute to public understanding of market structure and market quality in the futures markets.”

The 15 futures contracts covered by the study consist of three short-term interest rate contracts, four long-term interest rate contracts, five equity index contracts, two crude oil contracts, and one sugar contract.

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