Price Dynamics and Speculators in Crude Oil Future Marke

Abstract

This paper examines the behavior of crude oil futures price and volatility, analyzes the relationship between speculative traders’ positions and returns, and investigates whether speculative traders’ position changes have a significant effect on crude oil price. It also studies how speculation factor influence crude oil returns and volatility, whether returns are related to risks, and whether financial crises increase volatility in crude oil futures markets. The empirical results from Granger causality reveal that return lead speculative position, which indicates that non-commercial or managed money traders are a class of positive feedback traders or trend followers; and also reveal that the position changes held by speculative traders will cause crude oil price movement. Based on the estimation results of GARCH(1,1) model we verify position changes of non-commercial or managed money traders can impact crude oil futures returns significantly, and indicate returns are not related to conditional variance. Moreover, during the financial crisis, crude oil futures return shows an extreme large volatility. These findings can help us better understand price discovery process in crude oil futures market, and is useful in risk management and financial engineering.

Keywords: crude oil futures, price dynamics, speculation, noncommercial positions, managed money positions, decision engineering

JEL Classification: G13