Determinants of trading volume in futures markets

The determinants of volume in metal futures markets are examined empirically by first developing a theoretical model. Under the assumption that the trading agents can be categorized into 2 groups, speculators and hedgers, it is shown that volume can be represented as a function of inter- and intraday price volatilities and an information set. Using data that cover the period January 1, 1976-December 1, 1982, the model is employed to test daily and monthly relationships between the volume of trade and the various empirical variables. The results show that, in both the daily and the monthly regression equations, the most important variables are the volatility measures, with interest rates, open interest, and inflation also recording expected results. The basic conclusion is that volume in general is a function of more than one variable.