Speculators, Prices and Market Volatility

34 Pages Posted: 10 Jan 2011

See all articles by Celso Brunetti

Celso Brunetti

Board of Governors of the Federal Reserve System

Bahattin Buyuksahin

CoMeX Consulting and Advising

Jeffrey H. Harris

American University - Department of Finance and Real Estate

Date Written: January 7, 2011

Abstract

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.

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

JEL Classification: C3, G1

Suggested Citation

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

Celso Brunetti (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Bahattin Buyuksahin

CoMeX Consulting and Advising ( email )

Washington, DC
United States
2022904253 (Phone)

Jeffrey H. Harris

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

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