The effects of volatility risk on the volume of futures contracts trading at the Nairobi securities exchange

Abstract

The study sought to determine the effects of volatility risk on the volume of futures contracts traded at NSE. This study used a descriptive cross-sectional research design. The targeted population was the NSE Listed firms which trades in future contracts and the NSE25 Index Futures. The data used consisted of daily futures contract prices, the volume of daily futures contracts traded and the NSE25 Index Futures for the period 4th July 2019 to 4th July 2020. Secondary data obtained from NSE data-bank for the one-year period starting 4th July 2019 to 4th July 2020 was used for this study. Analysis was carried out using data for the NSE25 Index Futures, daily futures contracts prices and trading volume data. Descriptive statistics were used in summarizing the data. Information effects on Volatility was investigated by applying Heterogeneous Autoregressive Realized Volatility (HAR-RV) model. The study extended this model as HARX-RV model by adding the trade volume as a proxy for the information arrival in the HAR-RV model. The descriptive shows high mean and standard deviation values for volatility risk and low average figures for volume of trades. Results from HAR-RV model show that volatility of future contracts is persistent in the futures market at the NSE and the persistence reduces when volume is added to the model. The findings show a positive but insignificant effect of volatility risk on volume of trade. The study concludes that the number of future contracts traded is volatile. The researcher further concluded that changes in the volatility of futures contracts positively but insignificantly affect the volume of future contracts traded. The study recommends that investors understand future contract market behaviours so as to make informed investment decisions relating to their investment. The Capital Markets Authority, NSE and other policy makers should be conscious of the effects of other factors other than volatility on future contracts traded. The study recommends that similar study with a longer period and different variables.