Trading Institutions and Price Discovery: The Cash and Futures Markets for Crude Oil

FRB of Atlanta Working Paper No. 2004-28

90 Pages Posted: 13 Jan 2005 Last revised: 17 Mar 2017

Albert Ballinger

affiliation not provided to SSRN

Gerald P. Dwyer

Clemson University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Ann B. Gillette

Kennesaw State University - Michael J. Coles College of Business; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Date Written: November 1, 2004

Abstract

We provide substantial evidence that the futures market for West Texas Intermediate crude oil increased the short-term volatility of the cash price of crude oil. We show that the variability of prices increased using both published posted prices and transaction prices for producers. This increased volatility in the price of crude oil may reflect information aggregated into the price, an increase the variance of shocks to the price of crude oil, or noise in the futures price that affects the cash price. We present evidence from experiments consistent with the interpretation that information aggregation not feasible in a posted-price market can explain at least part of the increase in variance. This evidence supports the proposition that information not previously aggregated into the cash price for crude oil is at least part of the reason for the greater variability of the cash price after the opening of the futures market and provides at least one example in which a futures market increased the volatility of the cash market, and prices became more efficient.

Keywords: crude oil, futures, posted price, experiments, experimental finance, price discovery, information aggregation

JEL Classification: G13, G14, C9, C92

Suggested Citation

Ballinger, Albert and Dwyer, Gerald P. and Gillette, Ann B., Trading Institutions and Price Discovery: The Cash and Futures Markets for Crude Oil (November 1, 2004). FRB of Atlanta Working Paper No. 2004-28. Available at SSRN: https://ssrn.com/abstract=639721 or http://dx.doi.org/10.2139/ssrn.639721

Albert Ballinger

affiliation not provided to SSRN

Gerald P. Dwyer (Contact Author)

Clemson University ( email )

Department of Economics
Clemson University
Clemson, SC 29634
United States

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

Ann Brewer Gillette

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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