The determinants of volatility on the American crude oil futures market

Abstract

This article focuses on the volatility of crude oil futures prices on the New York Mercantile Exchange. It aims at examining whether this market creates excess volatility, which would not be observed in the absence of such a market. In order to reach this objective, price fluctuations are separated into two components: an information component that reflects a rational assessment of the information arrival, and an error component that represents the noise introduced by the trading process. We show that a significant part of the volatility recorded during exchange trading hours is caused by mispricing errors. In particular, this phenomenon affects the nearest futures contract. Copyright 2008 The Authors. Journal compilation 2008 Organization of the Petroleum Exporting Countries.

A new approach to measure speculation in the oil futures market and some policy implications

“…They suggest that incorporating open interest with trading volume data may shed insight into the price effects of market activity generated by informed and uninformed traders. The empirical studies that follow show a significant, positive effect on volatility associated with trading volume, particularly in the oil futures market (e.g., Bessembinder and Seguin, 1993;Forster, 1995;Fung and Patterson, 2001;Lautier and Riva, 2008). Working (1953aWorking ( , 1953b, however, suggests that the line between a hedger and speculator might not be clear cut.…”

“…However, recent studies, such as Lautier and Riva (2008), Reitz and Slopek (2008), and Tokic (2011), show that hedging activity can also contribute to higher futures market volatility. This is because if a hedger sees a potential positive price movement in the cash market, the hedger is very likely to obtain more long positions in the futures market to better cover his underlying position (an increase in the percentage of the position covered).…”

Petro Exchange in India: A Viability Check

“…It has attempted to explain how prices, rates of production, and inventory levels are interrelated, and are determined via equilibrium. Lautier et al [3], focuses on the volatility of crude oil futures prices on the New York Mercantile Exchange. It has aimed at examining whether this market creates excess volatility, which would not be observed in the absence of such a market.…”

Analysis of the Behavior of Volatility in Crude Oil Price

“…Specifically, we concentrate on articles related to oil and other commodities. Lautier and Riva (2004) investigated whether the existence of a derivative market affects the oil futures market. Horan et al (2004) analyzed volatility in the futures market by extracting the implied volatility from option contracts for periods coinciding with OPEC meetings.…”