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Speculators, Prices and Market Volatility

Celso Brunetti

Federal Reserve Board

Bahattin Buyuksahin

Bank of Canada

Jeffrey H. Harris

American University

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 [2010]) improve overall market quality.

Number of Pages in PDF File: 34

Keywords: Speculation, hedge funds, swap dealers, realized volatility, price

JEL Classification: C3, G1

working papers series

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Date posted: January 10, 2011  

Suggested Citation

Brunetti, Celso and Buyuksahin, Bahattin and Harris, Jeffrey H., Speculators, Prices and Market Volatility (January 7, 2011). Available at SSRN: http://ssrn.com/abstract=1736737 or http://dx.doi.org/10.2139/ssrn.1736737

Contact Information

Celso Brunetti (Contact Author)
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
Bahattin Buyuksahin
Bank of Canada ( email )
234 Wellington Street
Ontario, Ottawa K1A 0G9
Jeffrey H. Harris
American University ( email )
Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)
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References:  26
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