Did Amaranth's absolute, relative and extreme positions affect natural gas futures prices, spreads and volatilities?

Abstract

Amaranth Advisors LLC (Amaranth) suffered losses of $6.4 billion and failed in September 2006 as a result of its enormous spread trade bets in the natural gas futures markets and uncharacteristically large spread price movements. This financial fiasco led to a Congressional investigation, and, shortly thereafter, Amaranth was charged by the Commodity Futures Trading Commission (CFTC) and Federal Energy Regulatory Commission (FERC) with price manipulation. CFTC charged Amaranth with attempted, intraday, price manipulation in the natural gas futures market, and FERC charged Amaranth with perfected, intraday, price manipulation in the natural gas spot market. Marthinsen and Gai expanded the scope of these price manipulation charges by investigating whether Amaranth engaged in interday price manipulation during 2006. They found no convincing evidence of one-way Granger causality from changes in Amaranth's absolute positions to changes in the prices of natural gas derivatives contracts. This article expands on the interday price manipulation analysis of Marthinsen and Gai by testing for Granger causality between (1) changes in Amaranth's extreme positions and the returns on natural gas futures contracts, (2) changes in Amaranth's (calendar) spread positions and (calendar) spread prices on natural gas futures contracts, (3) changes in Amaranth's relative spread positions and spread prices, and (4) changes in Amaranth's positions and price volatility in the natural gas derivatives markets. Our results show no strong statistical evidence that changes in Amaranth's absolute, relative or extreme positions had significant effects on natural gas prices, spreads or volatilities. Therefore, this article casts further doubts on claims that Amaranth engaged in interday price manipulation.