Standard deviation or variance: The better proxy for large hedgers and large speculators risk in U.S. futures markets

Abstract

Using CFTC’s COT data, both GARCH and PARCH volatility based models found the lagged volatility and news about volatility from the previous month to be significant in explaining large hedgers’ and speculators’ volatility. The greater reliance on the ARCH term for speculators’ suggested their greater reliance on past information to extrapolate for their current decisions. Furthermore, hedgers’ volatility in Treasury bonds and coffee, and speculators’ volatility in gold and S&P500 futures have experienced increasing volatility persistence to shocks over the 1990s. In all remaining markets, hedgers’ and speculators’ volatility has shown a tendency to decay over time in response to shocks, supporting that both players are informed and react well to news volatility. The PARCH model explains volatility of both players better by exhibiting more negative components of volatility than the GARCH model. Both models, under normal and t distribution, supported that most futures returns in the 29 US markets were leptokurtic.