In futures markets, approaching the expiration days, most market participants close out existing positions of front month contract and open... Show moreIn futures markets, approaching the expiration days, most market participants close out existing positions of front month contract and open new positions of next month contract. The object of this dissertation is to evaluate the impact of contract rollover activities on unconditional volatility and conditional volatility modeling. First, two contract rollover measures, volume ratio and open interest ratio of front contract over next contract are created. Second, this study investigates the impact of contract rollover measures on both unconditional volatility estimation models and conditional volatility estimation models. Third, it examines the roles of contract rollover activities in unconditional volatility prediction models. Last, to further explore the relationship between contract rollover measures and unconditional volatilities, the vector autoregressive model is conducted to test granger causality. The findings show that the volume ratio and open interest ratio have significant impact on unconditional volatilities and conditional volatility in soybean, wheat, gold, copper, crude oil, and natural gas futures markets, except on conditional volatility in silver futures market. Alternative models that incorporate contract rollover measures outperform benchmark models that do not incorporate contract rollover measures in both estimation models and prediction models. Moreover, the findings provide the strong evidence that there is significant bidirectional granger causality among volume ratio, open interest ratio and unconditional volatilities in all investigated futures markets. The empirical results confirm the important role of contract rollover on volatility behavior and are beneficial to futures exchanges to set and monitor margins precisely for their customer’s trading accounts in commodity futures markets. Show less
