The Role of Speculators During Times of Financial Distress
Posted: 22 May 2019
Date Written: August 27, 2011
We utilize detailed, trader level data to examine the role of speculators during the failure of Amaranth Advisors, Inc. We find that speculators serve as a stabilizing force during this period, maintaining or increasing long positions even while prices are falling. We develop two testable propositions regarding liquidation versus transfer of positions and conclude that the probability of transfer is more likely for distant contract expirations and for contracts more dominantly held by the distressed trader. We also examine the role of speculators in providing liquidity and mitigating the effects of liquidity risk by evaluating the change in the number of traders, the size and time between trades, and a Herfindahl measure of speculative trader concentration during the crisis period.
Keywords: Hedge Funds, Speculators, Futures Markets
JEL Classification: G13, G14, G28
Suggested Citation: Suggested Citation