Sheep in Wolves' Clothing?

Robert J. Weiner

Cahiers de recherche from GREEN

Abstract: The 1990s have been a decade of upheaval in international financial markets. Much of the responsibility for financial instability has been placed on speculators, particularly hedge funds. Speculative capital has been characterized as "hot money", with capital flows driven by "herding" and "contagion" among players in foreign-exchange, stock, bond, and commodity markets. Policies to deal with financial instability 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. Since speculative trading cannot easily be observed, it is difficult to assess speculators' contribution, if any, to financial volatility. This paper looks at speculative behavior in one of the largest, and most volatile, international financial markets, petroleum derivatives. It utilizes a large, detailed database on individual trader positions in crude-oil and heating-oil futures markets. The paper is exploratory, focusing on measuring and assessing the tendency of speculators to herd. Two theories behind rational herding behavior are examined - the asymmetric information view (poorly-informed traders make decisions based on observing well-informed traders, rather than market fundamentals) and the monitoring/incentive view (institutiona investors make decisions knowing that their incentives are based on performance relative to a benchmark such as mean returns for a group). These theories generate different predictions regarding the types of speculators most likely to herd. The evidence does not support the view that herding among speculators as a group is widespread in this market. In contrast, evidence in favor of a moderate degree of herding among one group of speculators, commodity-fund managers. The evidence is supportive of the monitoring/incentive theory, but not the asymmetric-information theory.

Date: 2000
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.green.ecn.ulaval.ca/CahiersGREEN2000/00-01.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lvl:lagrcr:0001

Access Statistics for this paper

More papers in Cahiers de recherche from GREEN Contact information at EDIRC.
Bibliographic data for series maintained by Manuel Paradis ().