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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Esin Cakan & Rıza Demirer & Rangan Gupta & Hardik A. Marfatia, 2017. "Oil Speculation and Herding Behavior in Emerging Stock Markets," Working Papers 201749, University of Pretoria, Department of Economics.
    2. Omokolade Akinsomi & Mehmet Balcilar & Rıza Demirer & Rangan Gupta, 2017. "The effect of gold market speculation on REIT returns in South Africa: a behavioral perspective," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(4), pages 774-793, October.
    3. repec:eee:eneeco:v:66:y:2017:i:c:p:508-522 is not listed on IDEAS
    4. repec:eee:asieco:v:54:y:2018:i:c:p:69-91 is not listed on IDEAS
    5. 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.
    6. repec:eee:eneeco:v:65:y:2017:i:c:p:50-63 is not listed on IDEAS
    7. 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.

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    Keywords

    Oil futures; Regulation; Basis risk; Speculation;

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