Price Volatility and Speculative Activities In Pakistan Mercantile Exchange: A Granger – Causality Analysis

Abstract

This thesis discusses the probable Granger-causal link between short-term speculation in the first place, and commodity price volatility (conditional and historical) in the second place, in the commodities futures market. The research is executed for Pakistan in the period from 2015 to 2019. Stock price volatility is measured as regard to "conditional" and "historical" volatility, although the speculative activity is evidenced as "scalping" activity. To this end, we first examine the top 28 commodities which are top traded and imply a pairwise Granger causality analysis on an individual basis associated with energy, agriculture, indices, currency pairs, and metal contracts. Afterward, we set up panel Granger causality test category wise and in the third phase, we execute the panel Granger causality test combine altogether to estimate for extensive categories of commodities whether connections of lead-lag have existence between price volatility and speculation. The findings indicate that there can be similarities among price volatility and speculative trading practices, where both individual contract and commodity groups are viewed. The position of speculative trading is therefore critical for the volatility of future prices. Current relations between the two factors become more apparent as short-term speculation is mentioned. Hence, the most of key relationships lead to short-term speculation, leading to volatility. This indicates that the volatility-drivers type is a scalper and noise trading has dominated market volatility strength.