Speculators, Prices, and Market Volatility

Celso Brunetti, Bahattin Büyükşahin and Jeffrey Harris

Journal of Financial and Quantitative Analysis, 2016, vol. 51, issue 5, 1545-1574

Abstract: We use data from 2005–2009 that uniquely identify categories of traders to test how speculators such as hedge funds and swap dealers relate to volatility and price changes. In examining various subperiods where price trends are strong, we find little evidence that speculators destabilize financial markets. To the contrary, hedge fund position changes are negatively related to volatility in corn, crude oil, and natural gas futures markets. Additionally, swap dealer activity is largely unrelated to contemporaneous volatility. Our evidence is consistent with the hypothesis that hedge funds provide valuable liquidity and largely serve to stabilize futures markets.

Date: 2016
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Working Paper: Speculators, Prices and Market Volatility (2015)
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