Speculators, Prices and Market Volatility
Board of Governors of the Federal Reserve System (FRB)
Bank of Canada
Jeffrey H. Harris
January 7, 2011
We employ data over 2005-2009 which uniquely identify categories of traders to test whether speculators like hedge funds and swap dealers cause price changes or volatility. We find little evidence that speculators destabilize financial markets. To the contrary, speculative trading activity largely reacts to market conditions and reduces volatility levels, consistent with the hypothesis that speculators provide valuable liquidity to the market. These results hold across a variety of products and suggest that hedge funds (with approximately constant risk tolerance as in Deuskar and Johnson ) improve overall market quality.
Number of Pages in PDF File: 34
Keywords: Speculation, hedge funds, swap dealers, realized volatility, price
JEL Classification: C3, G1
Date posted: January 10, 2011
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