Volume In Redundant Assets

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Executive Summary

Why do multiple contingent claims on the same asset attract volume? Author addresses this issue by empirically analyzing the joint time-series of volume on the S&P 500 index and three contingent claims on the index, namely, the options, the futures, and the ETF. All series are highly cross-correlated but do not share calendar regularities; for example, an increase in volume in January occurs only in the spot index market. Vector auto regressions indicate that all series are jointly determined. Consistent with the informational role of markets for contingent claims, there is evidence that trading activity in these markets predicts shifts in the term structure and the credit spread, as well as returns around macroeconomic announcements.

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