Nonlinear relationship between crude oil price and net futures positions: A dynamic conditional distribution approach

Haiqi Li, Myeong Jun Kim and Sung Y. Park

International Review of Financial Analysis, 2016, vol. 44, issue C, 217-225

Abstract: This study examines the dynamic relationship between crude oil prices and net futures positions using a dynamic conditional density that can take account of time-varying bimodality. The shape of conditional density is modeled directly by specifying functional coefficients. We find that when the crude oil price is on the rise (decline), speculators tend to take long (short) positions to make profits and hedgers tend to take short (long) positions to cover the risk in the physical market. On the other hand, speculators have a positive effect on the price whereas hedgers have a negative effect. Therefore, when the price is on the rise (decline), speculators tend to push it up (pull it down) while hedgers tend to pull it down (push it up). This effect becomes stronger in the recent period. Moreover, the sharp increase of the crude oil price can be explained by speculating and hedging behavior through conditional higher-order moments.

Keywords: Crude oil price; Net futures position; Generalized normal distribution; Nonlinear model; Bimodal distribution (search for similar items in EconPapers)
JEL-codes: C22 G12 Q41 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:44:y:2016:i:c:p:217-225

DOI: 10.1016/j.irfa.2016.01.022

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