Return dynamics during periods of high speculation in a thinly traded commodity market

Abstract

This article studies the effects of speculation in a thinly traded commodity futures market, paying particular attention to periods characterized by high‐speculative activity of long–short speculators. Using the speculation ratio as a daily measure for long–short speculation, we employ generalized autoregressive conditional heteroscedasticity regressions to study its impact on return dynamics. Our results for the Chicago Mercantile Exchange feeder cattle futures market suggest that futures returns are predominantly explained by fundamentals, but their volatility is significantly driven by the speculation ratio. This relationship holds for periods of high‐ and low‐speculative activity alike.

Theoretical and experimental evidence on stock market volatilities: a two-phase flow model

“…The M.D.H. model has been widely adopted in empirical studies to explain the volume-volatility relationship in stock and futures markets, e.g., Kartsaklas (2018), Naik et al (2018) and Bohl and Stefan (2020). The S.I.A.H.…”

The Global Market for Exchange-Traded Derivatives: 21st Century Trends, Innovation and Failure

“…Note: This table reports inPanels A and B, respectively, the total number of contracts in January 2002 and June 2021 with breakdowns by geographic region, product group and asset class. Panel C reports the percent of legacy contract s still traded as of June 2021.6 Measuring volume on a daily basis,Garcia, Leuthold and Zapata (1986),Etienne, Irwin and Garcia (2015) andBohl and Stefan (2020) refer to this ratio as the speculation ratio.…”