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Futures Price Volatility in Commodities Markets: The Role of Short Term vs Long Term Speculation

  • Matteo Manera

    (University of Milan-Bicocca, Milan, and Fondazione Eni Enrico Mattei, Milan)

  • Marcella Nicolini

    (University of Pavia, Pavia, and Fondazione Eni Enrico Mattei, Milan)

This paper evaluates how different types of speculation affect the volatility of commodities’ futures prices. We adopt four indexes of speculation: Working’s T, the market share of non-commercial traders, the percentage of net long speculators over total open interest in future markets, which proxy for long term speculation, and scalping, which proxies for short term speculation. We consider four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) and seven non-energy commodities (cocoa, coffee, corn, oats, soybean oil, soybeans and wheat) over the period 1986-2010 analyzed at weekly frequency. Using GARCH models we find that speculation significantly affects volatility of returns: short term speculation has a positive and significant impact on volatility, while long term speculation generally has a negative effect. The robustness exercise shows that: i) scalping is positive and significant also at higher and lower data frequencies; ii) results remain unchanged through different model specifications (GARCH-in-mean, EGARCH, and TARCH); iii) results are robust to different specifications of the mean equation.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2013.45.

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Date of creation: May 2013
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Handle: RePEc:fem:femwpa:2013.45
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  1. James D. Hamilton, 2009. "Understanding Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 179-206.
  2. Cox, Charles C, 1976. "Futures Trading and Market Information," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1215-37, December.
  3. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
  4. Frans A. de Roon & Theo E. Nijman & Chris Veld, 2000. "Hedging Pressure Effects in Futures Markets," Journal of Finance, American Finance Association, vol. 55(3), pages 1437-1456, 06.
  5. Dwight R. Sanders and Scott H. Irwin, 2013. "Measuring Index Investment in Commodity Futures Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
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  8. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-52, October.
  9. Xiaodong Du & Cindy L. Yu & Dermot J. Hayes, 2009. "Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: A Bayesian Analysis," Food and Agricultural Policy Research Institute (FAPRI) Publications 09-wp491, Food and Agricultural Policy Research Institute (FAPRI) at Iowa State University.
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  14. repec:ner:tilbur:urn:nbn:nl:ui:12-83944 is not listed on IDEAS
  15. Matteo Manera, Marcella Nicolini, and Ilaria Vignati, 2013. "Financial Speculation in Energy and Agriculture Futures Markets: A Multivariate GARCH Approach," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
  16. Arjun Chatrath & Sanjay Ramchander & Frank Song, 1996. "The role of futures trading activity in exchange rate volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(5), pages 561-584, 08.
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  21. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
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