Bahattin Buyuksahin's Website

The Role of Speculators in the Crude Oil Futures Markets

Abstract:
The coincident rise in crude oil prices and increased numbers of financial participants in the crude oil futures market from 2000-2008 has led to allegations that "speculators" drive crude oil prices. As crude oil futures peaked at $147/bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes;–the results instead suggest that price changes do precede their position changes.

Is Speculation Destabilizing?

Abstract:
The possibility that speculative trading destabilizes or creates a volatile market is frequently debated. To test the hypothesis that speculative trading is destabilizing we employ a unique dataset from the U.S. Commodity Futures Trading Commission (CFTC) on individual positions of speculators. While others have used a more aggregated version of our data, here we test, for the first known time, whether speculators cause, in a forecasting sense, price movements and volatility in futures markets and, therefore, destabilize markets. Our findings provide evidence that speculative trading in futures markets is not destabilizing. In particular, speculative trading activity reduces volatility levels.

Fundamentals, Trader Activity and Derivative Pricing

Abstract:
We identify and explain a structural change in the relation between crude oil futures prices across contract maturities. As recently as 2001, near- and long-dated futures were priced as though traded in segmented markets. In 2002, however, the prices of one-year futures started to move more in sync with the price of the nearby contract. Since mid-2004, the prices of both the one-year-out and the two-year-out futures have been cointegrated with the nearby price. We link this transformation to changes in fundamentals, as well as to sea changes in the maturity structure and trader composition of futures market activity. In particular, we utilize a unique dataset of individual trader positions in exchange-traded crude oil options and futures to show that increased market activity by commodity swap dealers, and by hedge funds and other financial traders, has helped link crude oil futures prices at different maturities.

Commodities and Equities: 'A Market of One'?

Abstract:
Amidst a sharp rise in commodity investing, many have asked whether commodities nowadays move in sync with traditional financial assets. We provide evidence that challenges this idea. Using dynamic correlation and recursive cointegration techniques, we find that the relation between the prices of, and the returns on, investable commodity and U.S. equity indices has not changed significantly in the last fifteen years. We also find no evidence of a secular increase in co-movement between the returns on commodity and equity investments during periods of extreme returns.

Herding Among Large Speculative Traders in Futures Markets

Abstract

We test the prevalence of herding among large speculative traders in futures markets by employing a unique dataset from the U.S. CFTC on individual positions of these traders in thirty-two futures markets covering 2002 - 2006. Using detailed trader level data we test, for the first known time, whether herding exists among hedge funds and other speculative traders, and whether the herding serves to stabilize or destabilize market prices. While we find some mild evidence of herding among hedge funds and other types of speculators we conclude that the magnitude of herding by hedge funds is, on average, similar to that found in equity market studies and that this herding is not destabilizing.

Error Trades in Futures Markets

Abstract:
The increased dominance of electronic trading over open-outcry form of trading has called the attention of regulatory authorities on error trading policies, particularly since the process by which trades are cancelled can affect market integrity and users’ confidence in the markets. This study examines the effect of error trading on market integrity as well as price formation. Using data between 2000 and 2005, we analyze whether error trades affect the markets expectation of price, whether the composition of traders and types of trades change when an error occurs, whether certain traders trade more aggressively during an erroneous run up or run down and whether the market reacts to the later announcement of the error trade. We find evidence that the prices revert to normal quickly after an error takes place (before the exchange announces the error); we find that the composition of traders changes around the error (some types of traders limit their trading), and the types of orders placed changes (more market orders relative to limit orders) around the error episode. We have preliminary results on which category of trader initiates positions around an error that are consistent with a profitable or losing outcome.

Do Price Limits Limit Price Discovery in the Presence of Options?

Abstract:
We examine the effect of price limits on futures contracts where there exist options contracts on those futures that have no price limits. We establish that when options are trading, the futures price implied by put-call parity provides an accurate prediction of the unconstrained futures price. We also provide empirical evidence that futures trading volume decreases on limit hit days, and that some of this decline is effectively transferred to the options market. These facts suggest that price discovery shifts to the options market when limit hits occur on the futures market. We also document that the microstructure of the future's market on the next day is affected positively by the presence of options on limit days, as the presence of options lowers spreads and reduces intra-day price variability. In total, we find that options assist in price discovery in the presence of limits.

An Information-Theoretic Approach for Image Reconstruction

Abstract:
Often, we are faced with noisy data or images. At times, we have additional data that can be incorporated into our estimation or image reconstructions, but other times we just have the noisy (or blurry) image. In this work, we develop an information-theoretic (IT) estimation method for reconstructing blurry and noisy images. The resulting method extends (and builds on the foundations of) IT methods by further relaxing some of the underlying assumptions, uses minimal distributional assumptions, performs well (relative to current methods of estimation and image reconstruction), and uses all the available information (hard and soft data) efficiently. In other words, the IT framework discussed and developed here allows us to introduce different priors and other soft data into the estimation process while keeping the complexity of the estimation model to a minimum. In addition, to gain more precision, rather than estimating the signal as "point" estimates, we estimate the full distribution of each pixel. This method is computationally and statistically efficient. The same method also is used for estimating a large class of linear problems.


		Bahattin Buyuksahin Economist, Ph.D.
	Commodity Futures Trading Commission Office of the Chief Economist Contact Information 1155 21st. St. NW Washington, DC 20541 phone: (202) 436-0202 email: bahattin@buyuksahin.com	The Role of Speculators in the Crude Oil Futures Markets Abstract: The coincident rise in crude oil prices and increased numbers of financial participants in the crude oil futures market from 2000-2008 has led to allegations that "speculators" drive crude oil prices. As crude oil futures peaked at $147/bbl in July 2008, the role of speculators came under heated debate. In this paper, we employ unique data from the U.S. Commodity Futures Trading Commission (CFTC) to test the relation between crude oil prices and the trading positions of various types of traders in the crude oil futures market. We employ Granger Causality tests to analyze lead and lag relations between price and position data at daily and multiple day intervals. We find little evidence that hedge funds and other non-commercial (speculator) position changes Granger-cause price changes;–the results instead suggest that price changes do precede their position changes. Is Speculation Destabilizing? Abstract: The possibility that speculative trading destabilizes or creates a volatile market is frequently debated. To test the hypothesis that speculative trading is destabilizing we employ a unique dataset from the U.S. Commodity Futures Trading Commission (CFTC) on individual positions of speculators. While others have used a more aggregated version of our data, here we test, for the first known time, whether speculators cause, in a forecasting sense, price movements and volatility in futures markets and, therefore, destabilize markets. Our findings provide evidence that speculative trading in futures markets is not destabilizing. In particular, speculative trading activity reduces volatility levels. Fundamentals, Trader Activity and Derivative Pricing Abstract: We identify and explain a structural change in the relation between crude oil futures prices across contract maturities. As recently as 2001, near- and long-dated futures were priced as though traded in segmented markets. In 2002, however, the prices of one-year futures started to move more in sync with the price of the nearby contract. Since mid-2004, the prices of both the one-year-out and the two-year-out futures have been cointegrated with the nearby price. We link this transformation to changes in fundamentals, as well as to sea changes in the maturity structure and trader composition of futures market activity. In particular, we utilize a unique dataset of individual trader positions in exchange-traded crude oil options and futures to show that increased market activity by commodity swap dealers, and by hedge funds and other financial traders, has helped link crude oil futures prices at different maturities. Commodities and Equities: 'A Market of One'? Abstract: Amidst a sharp rise in commodity investing, many have asked whether commodities nowadays move in sync with traditional financial assets. We provide evidence that challenges this idea. Using dynamic correlation and recursive cointegration techniques, we find that the relation between the prices of, and the returns on, investable commodity and U.S. equity indices has not changed significantly in the last fifteen years. We also find no evidence of a secular increase in co-movement between the returns on commodity and equity investments during periods of extreme returns. Herding Among Large Speculative Traders in Futures Markets Abstract We test the prevalence of herding among large speculative traders in futures markets by employing a unique dataset from the U.S. CFTC on individual positions of these traders in thirty-two futures markets covering 2002 - 2006. Using detailed trader level data we test, for the first known time, whether herding exists among hedge funds and other speculative traders, and whether the herding serves to stabilize or destabilize market prices. While we find some mild evidence of herding among hedge funds and other types of speculators we conclude that the magnitude of herding by hedge funds is, on average, similar to that found in equity market studies and that this herding is not destabilizing. Error Trades in Futures Markets Abstract: The increased dominance of electronic trading over open-outcry form of trading has called the attention of regulatory authorities on error trading policies, particularly since the process by which trades are cancelled can affect market integrity and users’ confidence in the markets. This study examines the effect of error trading on market integrity as well as price formation. Using data between 2000 and 2005, we analyze whether error trades affect the markets expectation of price, whether the composition of traders and types of trades change when an error occurs, whether certain traders trade more aggressively during an erroneous run up or run down and whether the market reacts to the later announcement of the error trade. We find evidence that the prices revert to normal quickly after an error takes place (before the exchange announces the error); we find that the composition of traders changes around the error (some types of traders limit their trading), and the types of orders placed changes (more market orders relative to limit orders) around the error episode. We have preliminary results on which category of trader initiates positions around an error that are consistent with a profitable or losing outcome. Do Price Limits Limit Price Discovery in the Presence of Options? Abstract: We examine the effect of price limits on futures contracts where there exist options contracts on those futures that have no price limits. We establish that when options are trading, the futures price implied by put-call parity provides an accurate prediction of the unconstrained futures price. We also provide empirical evidence that futures trading volume decreases on limit hit days, and that some of this decline is effectively transferred to the options market. These facts suggest that price discovery shifts to the options market when limit hits occur on the futures market. We also document that the microstructure of the future's market on the next day is affected positively by the presence of options on limit days, as the presence of options lowers spreads and reduces intra-day price variability. In total, we find that options assist in price discovery in the presence of limits. An Information-Theoretic Approach for Image Reconstruction Abstract: Often, we are faced with noisy data or images. At times, we have additional data that can be incorporated into our estimation or image reconstructions, but other times we just have the noisy (or blurry) image. In this work, we develop an information-theoretic (IT) estimation method for reconstructing blurry and noisy images. The resulting method extends (and builds on the foundations of) IT methods by further relaxing some of the underlying assumptions, uses minimal distributional assumptions, performs well (relative to current methods of estimation and image reconstruction), and uses all the available information (hard and soft data) efficiently. In other words, the IT framework discussed and developed here allows us to introduce different priors and other soft data into the estimation process while keeping the complexity of the estimation model to a minimum. In addition, to gain more precision, rather than estimating the signal as "point" estimates, we estimate the full distribution of each pixel. This method is computationally and statistically efficient. The same method also is used for estimating a large class of linear problems.

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