Turnover Ratio
Last updated
Last updated
The turnover ratio, which is an advanced indicator used in commodity futures, is the 24 hour volume of a derivatives contract divided by its open interest. This provides the ratio of short-term trading and speculation relative to longer-term positions. During volatile periods, turnover tends to increase as traders look to profit on short-term price variations.
Liquidations also tend to spike during volatile periods, thus decreasing open interest and making turnover increase even further. Therefore, turnover ratio is an indicator that can be used to analyze how derivatives traders are reacting and positioning themselves according to market volatility.
The turnover ratio is helpful to grasp the investment time horizon amongst perpetual swaps traders. If the ratio of volume to open interest is high, this points to high short-term trade relative to longer-term positions. This is the case as open interest only accounts for outstanding position while volume measures both the opening and closing of positions.
The turnover ratio is intricately related to a crypto-asset’s volatility, which is why this is overlaid as a dotted line in the indicator. In periods of high volatility such as March 12, turnover ratio spikes as there is a simultaneous increase in short-term trading activity and closing of positions. Hence, the turnover ratio is helpful to gauge speculative activity and market positioning in relation to market volatility.
Speculation as measured by the turnover ratio has been found to precede and proceed spikes in returns and basis volatility over a period of 1-2 days. The turnover ratio proved very helpful in identifying on which centralized derivatives exchanges this predictable relationship is most significant. The research paper below examines this relationship between the Turnover Ratio and volatility amongst other things:
