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A new approach to measure speculation in the oil futures market and some policy implications

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  • Chan, Leo H.
  • Nguyen, Chi M.
  • Chan, Kam C.

Abstract

We propose using a new relative measure, the speculative ratio, defined as trading volume divided by open interest, to gauge speculative activity in the oil futures market. We apply the speculative ratio to examine the relation between basis and speculative activity in the oil futures market before and after the financialization of the oil market in 2003. Our finding suggests that the oil futures market is dominated by uninformed speculators in the post-financialization period. Our finding carries several practical policy implications, as follows: (1) both the commodity exchange and the regulator should design regulations and trading policies that improve basis risk; (2) on the commodity exchange side, new policies on margin requirements and position limits for speculators should be implemented; (3) margin requirements should be based on the level of basis risk; (4) regulators should speed up implementation of the position limit rule in the Dodd–Frank Act; and (5) stronger and more meaningful enforcement actions by regulators are required to punish and deter market manipulators.

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  • Chan, Leo H. & Nguyen, Chi M. & Chan, Kam C., 2015. "A new approach to measure speculation in the oil futures market and some policy implications," Energy Policy, Elsevier, vol. 86(C), pages 133-141.
    • Handle: RePEc:eee:enepol:v:86:y:2015:i:c:p:133-141
    DOI: 10.1016/j.enpol.2015.06.034
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    Cited by:

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    4. Riza Demirer & Rangan Gupta & Jacobus Nel & Christian Pierdzioch, 2020. "Effect of Rare Disaster Risks on Crude Oil: Evidence from El Nino from Over 140 Years of Data," Working Papers 2020104, University of Pretoria, Department of Economics.
    5. Bevin-McCrimmon, Fergus & Diaz-Rainey, Ivan & McCarten, Matthew & Sise, Greg, 2018. "Liquidity and risk premia in electricity futures," Energy Economics, Elsevier, vol. 75(C), pages 503-517.
    6. Vijay Singal & Jitendra Tayal, 2020. "Risky short positions and investor sentiment: Evidence from the weekend effect in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(3), pages 479-500, March.
    7. Luo, Jiawen & Demirer, Riza & Gupta, Rangan & Ji, Qiang, 2022. "Forecasting oil and gold volatilities with sentiment indicators under structural breaks," Energy Economics, Elsevier, vol. 105(C).
    8. Hang Zhang & Evangelos Giouvris, 2023. "What Is the Effect of Oil and Gas Markets (Spot/Futures) on Herding in BRICS? Recent Evidence (2007–2022)," JRFM, MDPI, vol. 16(11), pages 1-41, October.
    9. Balcılar, Mehmet & Demirer, Rıza & Ulussever, Talat, 2017. "Does speculation in the oil market drive investor herding in emerging stock markets?," Energy Economics, Elsevier, vol. 65(C), pages 50-63.
    10. Martin T. Bohl, Pierre Siklos, Claudia Wellenreuther, 2018. "Speculative Activity and Returns to Volatility of Chinese Major Agricultural Commodity Futures," LCERPA Working Papers 0111, Laurier Centre for Economic Research and Policy Analysis, revised 30 Jan 2018.
    11. Zghal, Imen & Ben Hamad, Salah & Eleuch, Hichem & Nobanee, Haitham, 2020. "The effect of market sentiment and information asymmetry on option pricing," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    12. Diaz-Rainey, Ivan & Roberts, Helen & Lont, David H., 2017. "Crude inventory accounting and speculation in the physical oil market," Energy Economics, Elsevier, vol. 66(C), pages 508-522.
    13. Juan Ignacio Guzmán & Enrique Silva, 2018. "Copper price determination: fundamentals versus non-fundamentals," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 31(3), pages 283-300, October.
    14. Bohl, Martin T. & Siklos, Pierre L. & Wellenreuther, Claudia, 2018. "Speculative activity and returns volatility of Chinese agricultural commodity futures," Journal of Asian Economics, Elsevier, vol. 54(C), pages 69-91.
    15. Mehmet Balcilar & Riza Demirer & Talat Ulussever, 2016. "Does speculation in the oil market drive investor herding in net exporting nations?," Working Papers 15-29, Eastern Mediterranean University, Department of Economics.
    16. Riza Demirer & Konstantinos Gkillas & Rangan Gupta & Christian Pierdzioch, 2022. "Risk aversion and the predictability of crude oil market volatility: A forecasting experiment with random forests," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 73(8), pages 1755-1767, August.
    17. Balcilar, Mehmet & Demirer, Rıza & Hammoudeh, Shawkat, 2019. "Quantile relationship between oil and stock returns: Evidence from emerging and frontier stock markets," Energy Policy, Elsevier, vol. 134(C).

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