Liquidity-Induced Dynamics in Futures Markets
AbstractFutures contracts on the New York Mercantile Exchange are the most liquid instruments for trading crude oil, which is the world’s most actively traded physical commodity. Under normal market conditions, traders can easily find counterparties for their trades, resulting in an efficient market with virtually no return predictability. Yet even this extremely liquid instrument suffers from liquidity shocks that induce periods of increased volatility and significant return predictability. This paper identifies an important and recurring cause of these shocks: the accumulation of extreme and opposing positions by the two main trader classes in the market, namely hedgers and speculators. As positions become extreme, approaching their historical limits, counterparties for trades become scarce and prices must adjust to induce trade. These liquidity-induced price adjustments are found to be driven by systematic speculative behavior and are determined to be significant.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6677.
Date of creation: 09 Jan 2008
Date of revision:
Liquidity; Futures Markets; Return Predictability; Volatility; Trader Positions; Directional Realized Volatility; Hedgers; Speculators; Position Bounds;
Other versions of this item:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-12 (All new papers)
- NEP-ENE-2008-01-12 (Energy Economics)
- NEP-FMK-2008-01-12 (Financial Markets)
- NEP-MST-2008-01-12 (Market Microstructure)
- NEP-RMG-2008-01-12 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Changyun Wang, 2003. "Investor sentiment, market timing, and futures returns," Applied Financial Economics, Taylor & Francis Journals, vol. 13(12), pages 891-898.
- Hasabrouck, Joel & Sofianos, George, 1993. " The Trades of Market Makers: An Empirical Analysis of NYSE Specialists," Journal of Finance, American Finance Association, vol. 48(5), pages 1565-93, December.
- Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013.
"The Fundamentals of Commodity Futures Returns,"
Review of Finance,
European Finance Association, vol. 17(1), pages 35-105.
- Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2007. "The Fundamentals of Commodity Futures Returns," NBER Working Papers 13249, National Bureau of Economic Research, Inc.
- Gary Gorton & Fumio Hayashi & K. Rouwenhorst, 2007. "The Fundamentals of Commodity Futures Returns," Yale School of Management Working Papers amz2605, Yale School of Management, revised 01 Oct 2008.
- Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
- Lebaron, B., 1990.
"Some Relations Between Volatility And Serial Correlations In Stock Market Returns,"
9002, Wisconsin Madison - Social Systems.
- LeBaron, Blake, 1992. "Some Relations between Volatility and Serial Correlations in Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 65(2), pages 199-219, April.
- Sanders, Dwight R. & Boris, Keith & Manfredo, Mark, 2004. "Hedgers, funds, and small speculators in the energy futures markets: an analysis of the CFTC's Commitments of Traders reports," Energy Economics, Elsevier, vol. 26(3), pages 425-445, May.
- Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
- Joelle Miffre, 2002. "The predictability of futures returns: rational variation in required returns or market inefficiency?," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 715-724.
- Cifarelli, Giulio & Paladino, Giovanna, 2011. "Hedging vs. speculative pressures on commodity futures returns," MPRA Paper 28229, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.