Is Speculation Destabilizing?

Abstract

The possibility that speculative trading destabilizes or creates a volatile market is frequently debated. To test the hypothesis that speculative trading is destabilizing we employ a unique dataset from the U.S. Commodity Futures Trading Commission (CFTC) on individual positions of speculators. While others have used a more aggregated version of our data, here we test, for the first known time, whether speculators cause, in a forecasting sense, price movements and volatility in futures markets and, therefore, destabilize markets. Our findings provide evidence that speculative trading in futures markets is not destabilizing. In particular, speculative trading activity reduces volatility levels.

Keywords: Speculation, hedge fund, swap dealer, realized volatility, price, Granger-causality

JEL Classification: C3, G1