Speculators, Prices and Market Volatility

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Non-Technical SummaryAs the recent financial crisis demonstrates, failures within the financial system can have devastating effects on the real economy. The crisis has elevated concerns about the trading behavior of financial market participants, particularly those operating outside the public eye. The burgeoning hedge fund industry, for instance, operates largely outside the jurisdiction of the U.S. Securities and Exchange Commission, with few public reporting requirements. Likewise, swap dealers operate in relatively opaque over-the-counter markets, fueling anxiety about their influence as well.In this paper, we analyze the trading of both hedge funds and swap dealers in futures markets from 2005 through 2009 to assess how these traders affect market volatility and prices. We use daily long and short positions of these traders with data from the U.S. Commodity Futures Trading Commission to analyze trading in crude oil, natural gas and corn markets-each of which experienced significant price volatility during the recent crisis. While this volatility was accompanied by increased hedge fund and swap dealer participation, we specifically test for lead-lag and contemporaneous relations between trader positions and both market volatility and prices during various subperiods when prices and volatility were inflated.We find that contemporaneous hedge fund positions were positively correlated with prices but negatively correlated with volatility. These results suggest that hedge funds provide liquidity to the market and facilitate price efficiency. Swap dealer positions, however, are largely unrelated to market returns and volatility. In contrast to the stabilizing influence of hedge funds, merchant positions (in crude oil and natural gas) are significantly positively related to market volatility. These results are consistent with Hirshleifer (1989Hirshleifer ( , 1990, where speculators are drawn to futures markets and the risk premiums are generated by hedging demand from other traders.We also examine whether the "financialization" of futures markets (as represented by the changing mix of participant positions) has affected the functioning of the futures markets. In every instance, we find that speculative position changes do not amplify volatility during the crisis and so do not impede the functioning of futures markets. Conversely, in each market we find that macroeconomic conditions are significantly related to future...

Do Speculators Drive Crude Oil Futures Prices?

“…5 Brunetti et al (2010) also find that speculative activity in five different futures markets (including crude oil) does not lead price changes, but reduces risk by enhancing market liquidity.…”

Volatile and Extreme Food Prices, Food Security, and Policy: An Overview

“…The so-called "financialization" hypothesis claims that volatile liquidity flows and rebalancing of portfolios have caused commodity markets to be more exposed to shocks and price movements at other financial markets (Basak und Pavlova 2014). Holding grains for financial portfolio diversification may not necessarily increase grain price volatility (Vercammen and Doroudian 2014), and empirical studies have yet to reach a consensus about the impacts of speculation and financialization on volatility (Brunetti et al 2011;Irwin and Sanders 2012;Tadesse et al 2014); however, some studies have found indications of volatility transmission (Tang und Xiong 2012). While this debate continues, it is important to note that futures markets (that involve also the participation of risk-loving speculators as contracting party to risk-averse hedgers) are crucial to coordinate supply and demand over time.…”

Speculators, Commodities and Cross-Market Linkages

“…Second, commodity-equity linkages fluctuate much more than the linkages between some other asset classes, offering fertile ground for an analysis of what (macroeconomic fundamentals, trading, or both) predicts those fluctuations. 2 Third, we seek to add not only to the asset pricing literature but also to a fastgrowing literature on the financialization of commodity markets -see, e.g., Acharya, Lochstoer & Ramadorai (2011), Brunetti, Büyük!ahin & Harris (2011), Brunetti and Reiffen (2011), Büyük!ahin, Haigh, Harris, Overdahl & Robe (2009), , Cheng, Kirilenko & Xiong (2012), Etula (2010), Hamilton and Wu (2012), Henderson, Pearson & Wang (2012), Hong and Yogo (2012), Irwin and Sanders (2012), Kilian and Murphy (2012), Korniotis (2009), Singleton (2013), Stoll and Whaley (2010), or Tang and Xiong (2012). This paper contributes to the debate on the financialization of commodities by identifying a relationship between financialization and the intensity of cross-market linkages.…”