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Herding and Speculation in the Crude Oil Market

We examine whether herding among speculators in U.S. crude oil futures markets affects market prices and volatility. Using detailed data on the positions of hedge funds and swap dealers from 2005-2009, we find little evidence that herding destabilizes the crude oil futures market. To the contrary, herding among speculative traders is negatively correlated with contemporaneous volatility and does not lead next-day volatility. Our impulse-response analysis shows that market regulators should monitor herding since a shock to herding among all groups may lead to price changes, and, in the case of hedge funds, may lead to increased volatility. Interestingly, however, increased swap dealer herding actually dampens crude oil price volatility.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Investment and Finance – Trading Strategies and Financial Instruments; Energy Modeling – Energy Data, Modeling, and Policy Analysis; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes: Q02: Commodity Markets, D47: Market Design, G13: Contingent Pricing; Futures Pricing; option pricing, Q41: Energy: Demand and Supply; Prices, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels, Q40: Energy: General

Keywords: Speculation, Hedge funds, Swap dealers, Realized volatility, Price

DOI: 10.5547/01956574.34.3.5

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Published in Volume 34, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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