Do Institutional Traders Predict Bull and Bear Markets?

41 Pages Posted: 19 Sep 2011  

Bahattin Buyuksahin

Bank of Canada

Celso Brunetti

Board of Governors of the Federal Reserve System

Jeffrey H. Harris

American University

Date Written: September 19, 2011

Abstract

We analyze the role of hedge fund, swap dealer and arbitrageur activity in a Markov regime-switching model between high volatility bear markets and low volatility bull markets for crude oil, corn and Mini-S&P500 index futures. We find that these institutional positions reflect fundamental economic factors within each market. More importantly, institutional positions also contribute incrementally to the probability of regime changes displaying the synchronization patterns modeled in Abreu and Brunnermeier (2002; 2003). Conditioning on hedge fund activity and arbitrageur activity significantly improves our probability estimates, demonstrating that institutional positions can be useful in determining whether price trends resembling bubble patterns will continue or reverse.

Keywords: Markov regime-switching, hedge fund, swap dealer, institutional positions

JEL Classification: C3, G1

Suggested Citation

Buyuksahin, Bahattin and Brunetti, Celso and Harris, Jeffrey H., Do Institutional Traders Predict Bull and Bear Markets? (September 19, 2011). Available at SSRN: https://ssrn.com/abstract=1930197 or http://dx.doi.org/10.2139/ssrn.1930197

Bahattin Buyuksahin (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Celso Brunetti

Board of Governors of the Federal Reserve System ( email )

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

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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