Investor behavior and volatility of futures market: A theory and empirical study based on the OLG model |
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Authors: | Yun Wang Zongcheng Zhang Renhai Hua |
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Institution: | 1. Center for Non-Traditional Security Studies, Hubei Key Research Institute of Humanities and Social Science, Huazhong Unversity of Science & Technology, Wuhan 430074, China; 2. Center for Non-Traditional Security Studies, Hubei Key Research Institute of Humanities and Social Science, Huazhong University of Science & Technology, Wuhan 430074, China; 3. School of Finance, Nanjing University of Finance & Economics, Nanjing 210037, China |
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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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Keywords: | investor behavior overlapping generation model momentum trading contrarian trading |
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