TRADING MECHANISMS AND PRICE VOLATILITY - SPOT VERSUS FUTURES

This paper compares the volatility of spot prices with that of futures prices using two estimators of volatility, natural and temporal. Using intraday data of the Major Market Index and its futures prices, we show that the well-known U-shaped volatility patterns during the day are not necessarily due to trading mechanisms. We also show that when a temporal estimator is substituted for a natural estimator, the U-shaped patterns disappear in both the spot and futures markets. We provide some reasons why a temporal estimator may add more information.