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Herding and Speculation in the Crude Oil Market

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  • Celso Brunetti
  • Bahattin Bykahin
  • Jeffrey H. Harris

Abstract

We examine whether herding among speculators in U.S. crude oil futures markets affects market prices and volatility. Using detailed data on the positions of hedge funds and swap dealers from 2005-2009, we find little evidence that herding destabilizes the crude oil futures market. To the contrary, herding among speculative traders is negatively correlated with contemporaneous volatility and does not lead next-day volatility. Our impulse-response analysis shows that market regulators should monitor herding since a shock to herding among all groups may lead to price changes, and, in the case of hedge funds, may lead to increased volatility. Interestingly, however, increased swap dealer herding actually dampens crude oil price volatility.

Suggested Citation

  • Celso Brunetti & Bahattin Bykahin & Jeffrey H. Harris, 2013. "Herding and Speculation in the Crude Oil Market," The Energy Journal, , vol. 34(3), pages 83-104, July.
    • Handle: RePEc:sae:enejou:v:34:y:2013:i:3:p:83-104
    DOI: 10.5547/01956574.34.3.5
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    References listed on IDEAS

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    4. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    5. Zhang, Lan & Mykland, Per A. & Ait-Sahalia, Yacine, 2005. "A Tale of Two Time Scales: Determining Integrated Volatility With Noisy High-Frequency Data," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 1394-1411, December.
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