Academic journal article The International Journal of Business and Finance Research

Determinants of Silver Futures Price Volatility: Evidence from the Thailand Futures Exchange

Academic journal article The International Journal of Business and Finance Research

Determinants of Silver Futures Price Volatility: Evidence from the Thailand Futures Exchange

Article excerpt


This research studies determinants of silver futures price volatility in Thailand Futures Exchange using generalized autoregressive conditional heteroskedasticity model. The sample data consist of daily closing price, volume, and open interest of silver futures from the period June 21, 2011 to December 26, 2012 for the nearby month contract with 376 sample data points. I construct data sample by switching or rolling over to the next maturing contract one day before the expiration date. The empirical results reveal there is no significant relationship between volatility and time to expiration. There are a negative role for trading volume and a positive role for open interest in determining silver futures price volatility. The analysis of silver futures price volatility insists the Clearing House that margin requirements for silver futures should not be affected as the time to maturity of the contract decreases. The findings are also helpful to risk managers dealing with silver futures and predicting silver futures price volatility.

JEL: C32, G13, G32

KEYWORDS: Futures Price Volatility, Silver Futures, Samuelson Hypothesis

(ProQuest: ... denotes formulae omitted.)


Derivatives products such as forwards, futures, and options are great tools, which investors can use to predict future spot prices and minimize their risk. Derivatives in Thailand have started long before Thailand Futures Exchange (TFEX) came into existence. Usually they are in the form of an over-the-counter between each counterparties. On May 17, 2004, TFEX, a subsidiary of the Stock Exchange of Thailand (SET), was established as a derivatives exchange. TFEX has traded SET50 index futures, SET50 index options, gold futures, silver futures, interest rate futures, single stock futures, crude oil futures, USD futures, and sector futures since then. In 2013, TFEX's average daily volume was 68,017 contracts, 55.21% more than the 43,823 in the previous year. About 99.61% of the 2013 derivatives trading were futures. Before trading futures in TFEX, investors are required to deposit initial margin with their respective brokers to ensure that they fulfill their futures contract obligations. Initial margin requirements for futures contracts are set by Thailand Clearing House Co., Ltd. (TCH). Their required rates are the same on the same underlying across different maturities and typically only 10 to 15 percent of the full value of the futures contracts. At the end of day, brokers will calculate the profit and loss and add or subtract funds via a Mark-to-Market process. If the balance in the margin account falls below the maintenance margin level, investor will receive a margin call to top up his or her margin account to meet the initial margin requirement. One of the important factors affecting margin rate is futures price volatility. Therefore, understanding and characterizing futures price volatility has been a key issue in futures market research. Previous research has explained futures price volatility by variables such as time to maturity, volume, and open interest.

Samuelson (1965) states that volatility of futures prices should increase as the contract approaches expiration. It is widely referred to as the "Samuelson hypothesis". The logic behind this conclusion is that the market is more sensitive to news regarding near-maturity contracts than more-distant contracts, which is indicated by greater volatility for the near-maturity contract (Ripple and Moosa, 2009). Numerous studies have investigated the Samuelson hypothesis empirically, and the hypothesis has been supported in commodity futures markets (Daal and Farhat, 2004; Duong and Kalev, 2008; Karali, Dorfman and Thurman, 2009; Karali and Thurman, 2010) and currency futures markets (Madarassy Akin, 2003). Samuelson hypothesis also holds in TFEX where SET50 futures price volatility (Dolsutham et al., 2011) and gold futures price volatility (Jongadsayakul, 2014b) increase as expiry approaches. …

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