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An Analysis of the Profiles and Motivations of Habitual Commodity Speculators

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Author Info

  • W. Bruce Canoles

    (Merrill Lynch Pierce Fenner & Smith Inc.)

  • Sarahelen R. Thompson

    (University of Illinois at Urbana-Champaign)

  • Scott H. Irwin

    (The Ohio State University)

  • Virginia G. France

    (University of Illinois at Urbana-Champaign)

  • .

Abstract

The focus of this study is the habitual speculator in commodity futures markets. The speculator's activity broadens a market, creates essential liquidity, and performs an irreplaceable pricing function. Working knowledge of the profiles and motivations of habitual speculators is essential to both market theorist and policy makers. Responses to a 73 question survey were collected directly from retail commodity brokers with offices in Alabama. Each questionnaire recorded information on an individual commodity client who had traded for an extended period of time. The typical trader studied is a married, white male, age 52. He is affluent and well educated. He is a self-employed business owner who can recover from financial setbacks. He is a politically right wing conservative involved in the political process. He assumes a good deal of risk in most phases of his life. He is both an aggressive investor and an active gambler. This trader does not consider preservation of his commodity capital to be a very high trading priority. As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style. To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run. He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences. Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.

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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 9705001.

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Length: 46 pages
Date of creation: 15 May 1997
Date of revision:
Handle: RePEc:wpa:wuwpfi:9705001

Note: Type of Document - Microsoft Word; prepared on P.C.; to print on HP Laser Jet; pages: 46. Office for Futures and Options Research (OFOR) at the University of Illinois, Urbana-Champaign. Working Paper 97-01. For a complete list of OFOR working papers see
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Keywords: speculation; commodity futures;

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References

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  1. Lease, Ronald C & Lewellen, Wilbur G & Schlarbaum, Gary G, 1974. "The Individual Investor: Attributes and Attitudes," Journal of Finance, American Finance Association, vol. 29(2), pages 413-33, May.
  2. Stewart, Blair, 1949. "An Analysis of Speculative Trading in Grain Futures," Technical Bulletins 156265, United States Department of Agriculture, Economic Research Service.
  3. Hartzmark, Michael L, 1991. "Luck versus Forecast Ability: Determinants of Trader Performance in Futures Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 49-74, January.
  4. Hartzmark, Michael L, 1987. "Returns to Individual Traders of Futures: Aggregate Results," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1292-1306, December.
  5. Baker, H. Kent & Hargrove, Michael B. & Haslem, John A., 1977. "An Empirical Analysis of the Risk-Return Preferences of Individual Investors," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(03), pages 377-389, September.
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Cited by:
  1. Stefan Reitz & Frank Westerhoff, 2007. "Commodity price cycles and heterogeneous speculators: a STAR–GARCH model," Empirical Economics, Springer, vol. 33(2), pages 231-244, September.
  2. He, Xue-Zhong & Westerhoff, Frank H., 2005. "Commodity markets, price limiters and speculative price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1577-1596, September.
  3. Westerhoff, Frank & Wieland, Cristian, 2010. "A behavioral cobweb-like commodity market model with heterogeneous speculators," Economic Modelling, Elsevier, vol. 27(5), pages 1136-1143, September.
  4. Gregor Dorfleitner, 2004. "How short-termed is the trading behaviour in Eurex futures markets?," Applied Financial Economics, Taylor & Francis Journals, vol. 14(17), pages 1269-1279.
  5. Cristian Wieland & Frank Westerhoff, 2004. "A behavioral cobweb model with heterogeneous speculators," Computing in Economics and Finance 2004 171, Society for Computational Economics.
  6. Jan Tuinstra & Joep Sonnemans & Cars Hommes & Peter Heemeijer, 2006. "Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation," Working Papers wp06-18, Warwick Business School, Finance Group.
  7. Stefan Reitz & Ulf Slopek, 2009. "Non-Linear Oil Price Dynamics: A Tale of Heterogeneous Speculators?," German Economic Review, Verein für Socialpolitik, vol. 10, pages 270-283, 08.
  8. Ellen, Saskia ter & Zwinkels, Remco C.J., 2010. "Oil price dynamics: A behavioral finance approach with heterogeneous agents," Energy Economics, Elsevier, vol. 32(6), pages 1427-1434, November.
  9. Vansteenkiste, Isabel, 2011. "What is driving oil futures prices? Fundamentals versus speculation," Working Paper Series 1371, European Central Bank.

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