Speculation and hedging in the currency futures markets: Are they informative to the spot exchange rates

Tornell, Aarón; Yuan, Chunming

doi:10.1002/fut.20511

Cited by 35 publications

(27 citation statements)

References 47 publications

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“…In this paper, we will extend the Wang (2001) sentiment measure and apply it to different categories of traders proposed by the DCOT report. Tornell and Yuan (2012) assumed that this sentiment index largely reflects the investors’ belief on the degree of bearishness or bullishness of the markets. Following Wang (2001, 2004) and Tornell and Yuan (2012), for each future contract the sentiment index for traders type i at week t , S I t i ( l ) , is measured as: where N P t , l i , .25em max = .25em max { N P t − l i , .25em N P t − l + 1 i , .25em … , .25em N P t i } and N P t , l i , .25em min = .25em min { N P t − l i , .25em N P t − l + 1 i , … , N P t i } are, respectively, the maximum and the minimum of the net positions of trader type i over the most rece...…”

Section: Methodsmentioning

confidence: 99%

Short-term contrarian and sentiment by traders’ types on futures markets

Bahloul

2018

RBF

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Purpose The purpose of this paper is to investigate whether the interaction between sentiments and past prices can lead to higher abnormal profit in futures markets. Such examinations allow the authors to relate the paper to the debate that focuses on examining the behavior of different types of traders in futures market, and who among these traders destabilize the markets. Design/methodology/approach First, the authors develop new dynamic strategies in US futures market that combine sentiment by type of traders based on trader position provided by the Disaggregated Commitments of Traders with short-term contrarian signals. Next, the authors adjust the abnormal profits to the CAPM model and Miffre and Rallis’s (2007) model. Finally, the authors use the Du (2012) decomposition methodology. Findings The main findings are that the abnormal profit is more pronounced when the authors combine past returns with lagged high producer/merchant/processor/user or low managed money sentiment. The results from swap dealer or other reportable groups show that there is no pervasive directional relation between their sentiment and contrarian profit. A further investigation of the sources of abnormal profits demonstrates that these profits survive even after the adjustment of obtained return to risk. Instead, these profits are mainly due to the overreaction to the news by irrational traders. Originality/value Based on behavioral finance theories, the authors conclude that producer, merchant, processor and user behave like irrational traders, while managed money traders behave like rational ones. Given that current regulatory proposes the limitation of speculation, the policy implications of these results are important. Therefore, these findings suggest that policy distinctions on trading motives may be more challenging to construct than ever.

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Section: Methodsmentioning

confidence: 99%

Short-term contrarian and sentiment by traders’ types on futures markets

Bahloul

2018

RBF

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“…Some limitations of the data must be addressed. Firstly, because of speculative position limits placed on noncommercials, some large traders might be inclined to classify themselves as commercials (Sanders et al, 2004;Tornell and Yuan, 2012). Therefore, true hedging positions are a subset of all commercial traders' positions (Sanders et al, 2004).…”

Section: Datamentioning

confidence: 99%

“…Therefore, true hedging positions are a subset of all commercial traders' positions (Sanders et al, 2004). Secondly, there is no way of knowing the motives of non-reporting traders (Sanders et al, 2004;Tornell and Yuan, 2012). In addition to this, the data contained in COT reports underestimate the true size of open interest in crude oil because they exclude the positions that are negotiated off the exchange, primarily in swap deals (Parsons, 2010).…”

Section: Datamentioning

confidence: 99%

Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?

Fowowe

2014

OPEC Energy Review

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A number of authors have attributed the high and volatile oil prices experienced since the turn of the 21st century to increased speculative activities arising from a relaxation of regulations in futures markets. This study examined the effects of speculative pressure on the volatility of spot oil prices. I constructed two measures of speculative pressure and modelled the volatility in oil returns by using the GARCH autoregressive conditional jump intensity model of Chan and Maheu, which models the effects of extreme news events in returns. Empirical results showed a significant positive coefficient for speculative pressure, implying that increased speculative pressure has contributed to volatile oil prices. This result is robust to different GARCH estimators and measures of speculative pressure.

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“…However, if speculators can consistently outperform and gain excess returns by forecasting futures prices, then regulators should be concerned about the efficiency and the functioning of these markets. A recent study by Tornell and Yuan (2012) suggests that the euro (EUR) futures market might be an interesting case regarding the study of speculators' potential to predict price changes. The authors report that, while there is generally no convincing evidence that traders' positions data is useful for predicting spot exchange rate changes, the euro is a notable exception.…”

Section: Introductionmentioning

confidence: 99%

Do speculative traders anticipate or follow USD/EUR exchange rate movements? New evidence on the efficiency of the EUR currency futures market

Hossfeld

Röthig

2016

Finance Research Letters

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Reproduction permitted only if source is stated. ISBN Non-technical summary Research QuestionFutures play a central role in financial markets by facilitating risk management and supporting the price discovery mechanism. In addition, standardized, liquid and transparent futures markets send price signals to spot and OTC derivatives markets. In order to fulfill these functions, they need to work in an efficient and robust manner. However, results from recent studies cast doubt on the efficiency of a particular futures market, namely the EUR currency futures market, since a certain type of trader, large speculators, is allegedly able to forecast and profit by trading on expected price (USD/EUR exchange rate) changes. ContributionThis paper builds on and extends the existing literature in two ways: First, it carefully revisits the empirical evidence about the contemporaneous relationship between the net long position of speculative investors in the EUR futures currency market and the USD/EUR exchange rate. In contrast to earlier studies, different categories of speculative investors are analyzed separately, and non-linear effects are allowed for. Second, the paper provides an analysis of whether the EUR currency futures market is really inefficient. We run a large set of predictive regressions, and check whether changes in the net long position of the different categories of speculators are informative about future exchange rate movements, or whether (temporal) causality tends to run the other way round. In contrast to earlier studies, we thereby explicitly account for the multiple test problem involved. ResultsThe results suggest that exchange rate movements lead changes in the net long position on EUR currency futures for all groups of speculative investors. This outcome even holds when adjusting the significance levels to account for the large number of statistical tests conducted. In contrast, the evidence for an indicator role of speculative positions for future exchange rate movements, and therefore an inefficient EUR currency futures market, largely collapses once more conservative significance levels are applied -for all groups of speculators considered, in fact. Earlier contrary results are possibly related to alpha error accumulation. Nichttechnische Zusammenfassung AbstractWe address the question of whether various types of speculative investor correctly anticipate future USD/EUR currency movements or whether they tend rather to react to past exchange rate movements. Throughout the analysis, we differentiate between large and small traders, and an upper bound of total speculation. To account for the large number of testable hypotheses, we contrast results obtained from predictive regressions based on individual significance tests with those based on either controlling the false discovery rate (FDR) or the family-wide error rate (FER). While the statistical evidence in favor of a causal relationship from speculative positions to exchange rate movements, and therefore an inefficient Euro futures market, ...

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Speculation and hedging in the currency futures markets: Are they informative to the spot exchange rates

Cited by 35 publications

References 47 publications

Short-term contrarian and sentiment by traders’ types on futures markets

Short-term contrarian and sentiment by traders’ types on futures markets

Paper oil and physical oil: has speculative pressure in oil futures increased volatility in spot oil prices?

Do speculative traders anticipate or follow USD/EUR exchange rate movements? New evidence on the efficiency of the EUR currency futures market

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