Round Number Effects in Crude Oil Futures Market

Abstract

Using the entire tick data for West Texas crude oil from 1996 to 2015, we find excess buying (selling) at price points just below (above) a round number over both pre- and post-electronic periods, confirming the existence of round number effects in commodity futures market. Next, we examine whether the trading activity of hedgers or speculators influence round number effects and find that the trading activity of hedgers influence round number effects. We also examine the relation between round number effects buy-sell imbalance and 24-hour trade return. We find that the relation is negative in crude oil futures market and a trading strategy based on round number effects generates the return of negative 0.0014 percent. Our result conflicts the finding of previous literature who documents strong evidence that there is positive relation between round number effects buy-sell imbalance and 24-hour trade return and show that a strategy based on round number effects generate a positive return of 0.11 percent in US stock markets. Lastly, controlling for market liquidity and volatility, we examine whether round number effects persist and find that round number effects persist. Additionally, given that speculation activity in commodity futures market has been the subjective of intense scrutiny since the boom and bust in commodity prices in 2008, we examine the impact of trading activity of speculators on commodity market. We find that speculators provide liquidity to hedgers and find no evidence that the trading activity of speculators increase market volatility.