Shanghai And London Metal Futures Market Volume And Price Relations,

The relationship between price changes and trading volume in financial markets has been the focus of financial research for a long time. On one hand, the research on the correlation of returns with volume in future markets helps us understanding the market structure and ways of information transmitting, which has an important theoretical value. On the other hand, trading volume and volatility are crucial index of risk control for future exchanges. Consequently the research in this area can help us improve the risk management.This paper set up a theoretical volume-price model based on stochastic market supply and demand. Additionally we analyzed the effect that costly short-sales, investor structure, up-bottom price limit, futures margin etc. have on the correlation of returns with volume. We find that the correlation of returns with volume is positive on financial markets with costly short-sales. In addition, traders have psychological short-sales restriction on a markets with majority of individual investors even if short sales are not costly according to the institution. We also find that symmetrical margin or up-bottom price limit with a large range does not have any effect on the correlation of returns with volume, but does have some effect on the trading volume.With this theoretical model we analyze the correlation of returns with volume on Shanghai futures market and London metal futures market. Then we test the relationship between return and volume on SHFE and LME markets with quantile regression, GARCH model and OLS method. The result shows that relationships between return and volume are different. In Shanghai market, positive returns usually come with large volumes and also for negative yields. On contrary, the correlation of returns and volume on LME market is not so significant. Traditional OLS method can not get such results. The correlation of returns and volume on SHFE markets is asymmetrically "V" shaped.The empirical test results concide with our theoretical model. The correlation of returns with volume on SHFE market supports Karpoff's hypothesis. Investor structure is the crucial factor that leads to the difference of SHFE and LME. In order to improve the market efficiency and make full use of future markets, institutional investors should be added into the market and the investor structure should be optimized.