Investor sentiment spillover effect and market quality in crude oil futures

Abstract

This study examines the influence of investor sentiment on trading behavior in crude oil futures. We find that money manager traders (i.e., hedge funds) adopt positive feedback trading strategies in normal periods and turn to negative feedback trading in pessimistic periods. Meanwhile, swap dealers adopt negative feedback trading in normal periods and reduce the intensity of their negative feedback trading during pessimistic periods. We also find that the sentiment-driven trading of money manager traders and swap dealers does not hurt the quality of the crude oil futures market in either pessimistic or optimistic periods. In contrast, producers' (hedgers’) positions increase volatility and pricing errors in the crude oil futures market.