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Rational destabilizing speculation, positive feedback trading, and the oil bubble of 2008

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  • Tokic, Damir
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    This article examines how the interaction of different participants in the crude oil futures markets affects the crude oil price efficiency. Normally, the commercial market participants, such as oil producers and oil consumers, act as arbitrageurs and ensure that the price of crude oil remains within the fundamental value range. However, institutional investors that invest in crude oil to diversify their portfolios and/or hedge inflation can destabilize the interaction among commercial participants and liquidity-providing speculators. We argue that institutional investors can impose limits to arbitrage, particularly during the financial crisis when the investment demand for commodities is particularly strong. In support, we show that commercials hedgers had significantly reduced their short positions leading to the 2008 oil bubble--they were potentially aggressively offsetting their short hedges. As a result, by essentially engaging in a positive feedback trading, commercial hedgers at least contributed to 'the 2008 oil bubble'. These findings have been mainly overlooked by the existing research.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0301-4215(11)00059-0
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    Article provided by Elsevier in its journal Energy Policy.

    Volume (Year): 39 (2011)
    Issue (Month): 4 (April)
    Pages: 2051-2061

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    Handle: RePEc:eee:enepol:v:39:y:2011:i:4:p:2051-2061
    Contact details of provider: Web page: http://www.elsevier.com/locate/enpol

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    1. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Scholarly Articles 27693805, Harvard University Department of Economics.
    2. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
    3. Kaufmann, Robert K. & Ullman, Ben, 2009. "Oil prices, speculation, and fundamentals: Interpreting causal relations among spot and futures prices," Energy Economics, Elsevier, vol. 31(4), pages 550-558, July.
    4. Dufour, Alfonso & Engle, Robert F, 1999. "Time and the Price Impact of a Trade," University of California at San Diego, Economics Working Paper Series qt62c0h04j, Department of Economics, UC San Diego.
    5. Derek Headey & Shenggen Fan, 2008. "Anatomy of a crisis: the causes and consequences of surging food prices," Agricultural Economics, International Association of Agricultural Economists, vol. 39(s1), pages 375-391, November.
    6. Kesicki, Fabian, 2010. "The third oil price surge - What's different this time?," Energy Policy, Elsevier, vol. 38(3), pages 1596-1606, March.
    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. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
    9. Giulio Cifarelli & Giovanna Paladino, 2008. "Oil price Dynamics and Speculation. A Multivariate Financial Approach," Working Papers - Economics wp2008_15.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    10. Sanders, Dwight R. & Irwin, Scott H. & Merrin, Robert P., 2008. "The Adequacy of Speculation in Agricultural Futures Markets:Too Much of a Good Thing?," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37615, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    11. Bekiros, S. & Diks, C.G.H., 2007. "The Relationship between Crude Oil Spot and Futures Prices: Cointegration, Linear and Nonlinear Causality," CeNDEF Working Papers 07-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    12. Louis K. C. Chan & Jason Karceski & Josef Lakonishok, 2003. "The Level and Persistence of Growth Rates," Journal of Finance, American Finance Association, vol. 58(2), pages 643-684, 04.
    13. Tokic, Damir, 2010. "The 2008 oil bubble: Causes and consequences," Energy Policy, Elsevier, vol. 38(10), pages 6009-6015, October.
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