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Do Birds of a Feather Flock Together? Speculator Herding in the World Oil Market

  • Robert Weiner

    ()

    (Resources for the Future)

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    This paper looks at speculative behavior in the international oil market. Much of the blame for oil-market turbulence has been placed on speculators, particularly hedge funds. Speculative capital has been characterized as “hot money,” with capital flows driven by “herding,” “flocking,” and “contagion.” Policies to deal with volatility by weakening, or even disabling speculation, have been based largely on anecdote, convenience (speculators have long served as scapegoats for various problems), and ideology, rather than careful analysis. Part of the problem arises from the secrecy with which speculators operate. Because speculative trading cannot easily be observed, it is difficult to assess speculators’ contribution, if any, to volatility. The paper utilizes a large, detailed database on individual trader positions in crude-oil and heating-oil futures markets. The paper is exploratory, with focus on measuring and assessing the tendency of speculators to herd (trade in the same direction as a group) and flock (trade in the same direction by subgroups of speculators).

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    File URL: http://www.rff.org/RFF/documents/RFF-DP-06-31.pdf
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    Paper provided by Resources For the Future in its series Discussion Papers with number dp-06-31.

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    Date of creation: 29 Jun 2006
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    Handle: RePEc:rff:dpaper:dp-06-31
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    1. Scharfstein, David S & Stein, Jeremy C, 1990. "Herd Behavior and Investment," American Economic Review, American Economic Association, vol. 80(3), pages 465-79, June.
    2. Takatoshi Ito & Richard K. Lyons & Michael T. Melvin, 1998. "Is There Private Information in the FX Market? The Tokyo Experiment," Journal of Finance, American Finance Association, vol. 53(3), pages 1111-1130, 06.
    3. Russ Wermers, 1999. "Mutual Fund Herding and the Impact on Stock Prices," Journal of Finance, American Finance Association, vol. 54(2), pages 581-622, 04.
    4. Phillips, Gordon M & Weiner, Robert J, 1994. "Information and Normal Backwardation as Determinants of Trading Performance: Evidence from the North Sea Oil Forward Market," Economic Journal, Royal Economic Society, vol. 104(422), pages 76-95, January.
    5. Dale, Charles & Zyren, John, 1996. "Noncommercial Trading in the Energy Futures Market," MPRA Paper 47463, University Library of Munich, Germany.
    6. Devenow, Andrea & Welch, Ivo, 1996. "Rational herding in financial economics," European Economic Review, Elsevier, vol. 40(3-5), pages 603-615, April.
    7. Woochan Kim & Shang-Jin Wei, 1999. "Foreign Portfolio Investors Before and during a Crisis," OECD Economics Department Working Papers 210, OECD Publishing.
    8. 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.
    9. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
    10. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 309-331, September.
    11. Barry Eichengreen, James Tobin, and Charles Wyplosz., 1994. "Two Cases for Sand in the Wheels of International Finance," Center for International and Development Economics Research (CIDER) Working Papers C94-045, University of California at Berkeley.
    12. Robert J Weiner, 2005. "Speculation in international crises: report from the Gulf," Journal of International Business Studies, Palgrave Macmillan, vol. 36(5), pages 576-587, September.
    13. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
    14. Louis Ederington & Jae Ha Lee, 2002. "Who Trades Futures and How: Evidence from the Heating Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 75(2), pages 353-374, April.
    15. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W., 1992. "The impact of institutional trading on stock prices," Journal of Financial Economics, Elsevier, vol. 32(1), pages 23-43, August.
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