Trends and Determinants of Volatility: A Study of Soybean Futures Contracts

Abstract

This study examines the trends and determinants of volatility in the context of the Indian futures market by taking soybean futures contracts traded on NCDEX. The sample consists of daily data on closing price, trading volume and open interest from Jan 3, 2005 to Dec 31, 2019. ARMA-GARCH model is being estimated for empirical analysis. The study finds that return distribution exhibits thick tails, time-varying volatility and volatility persistence. The GARCH effects are greater than the ARCH effects, which indicate that volatility is more sensitive to its own lagged values than recent news. The study finds a positive relationship between trading volume and volatility, whereas a negative relationship is observed between open interest and volatility. It was also observed that the inclusion of trading volume and open interest in the GARCH model reduces volatility persistence. The study concludes that trading volume and open interest are two important determinants of volatility.