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Fundamentals, Trader Activity and Derivative Pricing

56 Pages Posted: 2 Mar 2007 Last revised: 13 Feb 2009

Bahattin Buyuksahin

Bank of Canada

Michael S. Haigh

Standard Chartered Bank

Jeffrey H. Harris

American University

James A. Overdahl

affiliation not provided to SSRN; U.S. Office of the Comptroller of the Currency

Michel A. Robe

University of Illinois at Urbana-Champaign

Date Written: December 4, 2008

Abstract

We identify and explain a structural change in the relation between crude oil futures prices across contract maturities. As recently as 2001, near- and long-dated futures were priced as though traded in segmented markets. In 2002, however, the prices of one-year futures started to move more in sync with the price of the nearby contract. Since mid-2004, the prices of both the one-year-out and the two-year-out futures have been cointegrated with the nearby price. We link this transformation to changes in fundamentals, as well as to sea changes in the maturity structure and trader composition of futures market activity. In particular, we utilize a unique dataset of individual trader positions in exchange-traded crude oil options and futures to show that increased market activity by commodity swap dealers, and by hedge funds and other financial traders, has helped link crude oil futures prices at different maturities.

Keywords: Crude Oil Futures, Maturity, Segmentation, Cointegration, Trading Activity, Fundamentals

JEL Classification: G10, G13, L89

Suggested Citation

Buyuksahin, Bahattin and Haigh, Michael S. and Harris, Jeffrey H. and Overdahl, James A. and Robe, Michel A., Fundamentals, Trader Activity and Derivative Pricing (December 4, 2008). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=966692 or http://dx.doi.org/10.2139/ssrn.966692

Bahattin Buyuksahin

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Michael Stephen Haigh

Standard Chartered Bank ( email )

6 Battery Rd
049909
Singapore
65-8838-7318 (Phone)

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)

James A. Overdahl

affiliation not provided to SSRN ( email )

U.S. Office of the Comptroller of the Currency ( email )

Independence Square
250 E Street SW
Washington, DC 20219-0001
United States
202-874-3917 (Phone)

Michel A. Robe (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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