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Is Speculation Destabilizing?

37 Pages Posted: 22 Apr 2009  

Celso Brunetti

Board of Governors of the Federal Reserve System

Bahattin Buyuksahin

Bank of Canada

Date Written: April 22, 2009


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

Suggested Citation

Brunetti, Celso and Buyuksahin, Bahattin, Is Speculation Destabilizing? (April 22, 2009). Available at SSRN: or

Celso Brunetti

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Bahattin Buyuksahin (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

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