Liquidity-Induced Dynamics in Futures Markets
Stephen Fagan () and
MPRA Paper from University Library of Munich, Germany
Futures contracts on the New York Mercantile Exchange are the most liquid instruments for trading crude oil, which is the world’s most actively traded physical commodity. Under normal market conditions, traders can easily find counterparties for their trades, resulting in an efficient market with virtually no return predictability. Yet even this extremely liquid instrument suffers from liquidity shocks that induce periods of increased volatility and significant return predictability. This paper identifies an important and recurring cause of these shocks: the accumulation of extreme and opposing positions by the two main trader classes in the market, namely hedgers and speculators. As positions become extreme, approaching their historical limits, counterparties for trades become scarce and prices must adjust to induce trade. These liquidity-induced price adjustments are found to be driven by systematic speculative behavior and are determined to be significant.
Keywords: Liquidity; Futures Markets; Return Predictability; Volatility; Trader Positions; Directional Realized Volatility; Hedgers; Speculators; Position Bounds (search for similar items in EconPapers)
JEL-codes: C1 C53 G10 G13 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ene, nep-fmk, nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
https://mpra.ub.uni-muenchen.de/6677/1/MPRA_paper_6677.pdf original version (application/pdf)
Working Paper: Liquidity-Induced Dynamics in Futures Markets (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:6677
Access Statistics for this paper
More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().