The Dynamic Relationship between Volatility, Volume and Open Interest in CSI 300 Futures Market

This paper investigates the dynamic relationship between volatility, volume and open interest in CSI 300 futures market using asymmetric GARCH model, Granger causality test, variance decomposition and impulse response function based on 1-min data. ARMA-EGARCH model is employed and find that both contemporaneous and lagged volume is positively related to volatility, and current open interest has positive effect on volatility while lagged open interest has negative effect. Furthermore, volume is positively related to volatility and open interest is negatively linked to volatility when take (lagged) volume and (lagged) open interest into account simultaneously. The Granger causality test indicates that there is unidirectional Granger causality from return to open interest, whereas there is bidirectional Granger causality between open interest (return) and volume. Variance decomposition and impulse response function reveal that most variance of return, volume or open interest is triggered by itself. These results imply that volume and open interest are complementary in information dissemination, while volume measures the trade activity and open interest indicates market depth. Key-Words: Index futures, open interest, volatility, EGARCH, VAR, Granger causality test, high-frequency data, time series forecasting