Speculative Trading Research Articles

Markets, mis‐direction and motives: A factual analysis of hoarding and speculation in southern Murray–Darling Basin water markets

There is a long history of concern about speculation in water markets, and potential adverse impacts on agricultural water users. However, applications of traditional analysis into price increase drivers in water markets are challenging due to data limitations. To address this, we use speculation theory, most notably Hirshleifer’s four fundamentals for speculative trade, to examine whether speculation or hoarding price increase drivers are evident in Australia’s largest water market, the southern Murray–Darling Basin. While speculation is likely, and with good reason given the gains possible, we find no evidence of hoarding behaviour in market price or volume trends. It is more plausible that agricultural sectors – notably horticultural users – have driven price increases given their requirements to access water at any cost during periods of low supply. These findings conform to theoretical expectations and help to inform badly needed insights into water market fundamentals required for future analysis. Overall, calls for stricter market controls on non‐agricultural water users are not supported by our findings. However, greater transparency in water market and broker activity, arising from substantial improvements in the underlying data and trade regulations associated with water markets, would be an ideal outcome from any public police extension.

Do Dow Jones Islamic equity indices undergo speculative pressure? New insights from a nonlinear and asymmetric analysis

AbstractThis paper study the exposure of Dow Jones Islamic equity indices to global risk factors while considering both effects of speculative influence and fundamental changes. The study involves future markets according to Shari'a guidelines that ban speculative trading. Nonlinear ARDL modelling approach along with dynamic asymmetric causality tests is conducted to scrutinize long‐run and short‐run asymmetries and asymmetric causalities. The used data are crude refined oil future prices to stand for fundamental chocks in speculative trading and implied volatility index to stand for speculative pressure. Obtained results approve the presence of asymmetric cointegration between Islamic equity indices and oil‐VIX future prices. The Islamic indices are sensitive to oil‐VIX future chocks both in the long run and the short run. Asymmetric causality tests indicate the existence of asymmetric causality running from crude refined oil future prices which confirm the fundamental contagion effects but the causality from VIX to Islamic indices is not pronounced at all. Results support the absence of speculative influence on Islamic indices and prove that DJIM indices corroborate with Shari'a compliant rules. In sum, the paper confirms the asymmetric cointegration and then assumes that the asymmetry is present in Islamic equity indices inherent to changes in international futures prices. The paper shows the structure of exposure to global markets' expectations and provides faith‐based investors with insights about the attitude of Islamic indices towards the future. Our findings suggest useful highlights to policymakers, portfolio managers, faith‐based investors and scholars. We then could state that if long‐run relationship occurs it is naturally asymmetrical.

When a Master Dies: Speculation and Asset Float

Abstract An artist’s death constitutes a negative shock to his future production; death permanently decreases the artist’s float. We use this shock to test predictions of speculative trading models with short-selling constraints. As predicted in our model, we find that an artist’s premature death leads to a permanent increase in prices and turnover; this effect being larger for more famous artists. We document that premature death increases prices (by 54.7%) and secondary market volume (by 63.2%).

Speculative trade under ambiguity

Ambiguous beliefs may lead to speculative trade and speculative bubbles. We demonstrate this by showing that the classical Harrison and Kreps (1978) example of speculative trade among agents with heterogeneous beliefs can be replicated with agents having common but ambiguous beliefs. More precisely, we show that the same asset prices and pattern of trade can be obtained in equilibrium with agents' having recursive multiple-prior expected utilities with common set of priors.While learning about the true probabilities of dividends makes speculative bubbles vanish in the long run under heterogeneous beliefs, it may not do so under common ambiguous beliefs. Ambiguity need not disappear with learning over time, and speculative bubbles may persist.

Financial transaction tax and market quality: Evidence from France†

AbstractThe effectiveness of Financial Transaction Taxes (FTTs) for deterring speculative trading and improving market quality remains controversial. Studying the FTT imposed in 2012 on large‐cap stocks traded on the Euronext Paris, we find that stocks subject to the FTT subsequently experience significantly decreased turnover and increased spreads relative to the untaxed peers. Further tests suggest that the FTT imposition induces investors to migrate their trades and results in less informativeness in the taxed stocks. Collectively our findings support the view that FTTs deter informed trades and reduce market quality.

Stock return predictability: Evidence from moving averages of trading volume

This study investigates the role of moving averages of trading volume on asset pricing. We find that the distance between short- and long-term moving averages of trading volume (MAVD) strongly and negatively predicts the cross-section of stock returns in the Chinese stock market. This predictive power is robust after controlling for other firm characteristics, well-known risk factors and market timing, and goes well beyond the price-based distance predictor. Moreover, the MAVD effect diminishes as portfolio holding months move further away from the portfolio formation month and even reverses at the end of the second year, which suggests that stock market overreacts to the information from MAVD and the resulting mispricing is gradually corrected. Our results also show that the MAVD effect is stronger in stocks with high limits of arbitrage and more investor attention, as well as in the periods of high sentiment and high investor overconfidence, which is consistent with behavioral mispricing explanations. Furthermore, we find that the MAVD effect is likely to be attributable to individual speculative trading behavior. Finally, the evidence indicates that the predictive power of MAVD is more pronounced among high volatility stocks rather than among low volatility stocks.

Estimating the proportion of informed and speculative traders in financial markets: evidence from exchange rate

We study the Glosten–Milgrom model and estimate the proportion of informed traders or speculators using bid–ask spread and price range. The GM model is generalized in terms of a key parameter $$ \theta $$ —the probability of making a correct decision by an agent. Informed traders have $$ \theta = 1 $$ , and uninformed traders have $$ \theta = 1/2 $$ in the GM model. Speculators are defined to be agents with $$ 1/2 < \bar{\theta } < 1 $$ . We show that bid–ask spread can be generated when speculators and uninformed traders are in the market—the presence of informed traders is unnecessary. We estimate the proportion of informed traders or speculators using the spread-to-range ratio as a proxy, which entails a new estimation method. Using three exchange rate data, we obtain the conditional mean of the proportion of informed traders and speculators over a seven-year period. Speculators can achieve probability $$ \bar{\theta } > 1/2 $$ using simple trading rules within short trading horizons and net of transaction cost.

Optimal Hedging with Margin Constraints and Default Aversion and its Application to Bitcoin Perpetual Futures

We consider the hedging problem where a futures position can be automatically liquidated by the exchange without notice. We derive a semi-closed form for an optimal hedging strategy with dual objectives -- to minimise both the variance of the hedged portfolio and the probability of liquidations due to insufficient collateral. The optimal solution depends on the statistical characteristics of the spot and futures extreme returns and parameters that characterise the hedger by loss aversion, choice of leverage and collateral management. An empirical analysis of bitcoin shows that the optimal strategy combines superior hedge effectiveness with a reduction in the probability of liquidation. We compare the performance of seven major direct and inverse hedging instruments traded on five different exchanges, based on minute-level data. We also link this performance to novel speculative trading metrics, which differ markedly between venues.

The Effect of Ambiguity on Price Formation and Trading Behavior in Financial Markets

This paper sets up an experimental asset market in the laboratory to investigate the effects of ambiguity on price formation and trading behavior in financial markets. The obtained trading data is used to analyze the effect of ambiguity on various market outcomes (the price level, volatility, trading activity, market liquidity, and the degree of speculative trading) and to test the quality of popular empirical market-based measures for the degree of ambiguity. We find that ambiguity decreases market prices and trading activity; ambiguity leads to lower market liquidity through wider bid-ask spreads; and ambiguity leads to less speculative trading. We also find that popular market-based measures of ambiguity used in the empirical literature do not seem to correctly capture the true degree of ambiguity.

Do Retail Traders Destabilize Financial Markets? An Investigation Surrounding the COVID-19 Pandemic

Economic theory suggests that speculative trading can lead to instability in financial markets.This study extends the literature and investigates the impact of retail (speculative) trading onthe volatility of financial markets with a focus on the COVID-19 pandemic. Our tests are basedon the data on marketable retail trades identified using the Boehmer et al. (2021) algorithm andsupplemented with retail ownership data obtained from the discount brokerage Robinhood, apioneer of commission free trading in the US. Using a series of novel econometric methods, wedocument a causal negative impact of speculative trading on the stability of the financial marketsthat is particularly enhanced during the pandemic. These results shed light on the enhancedrole of retail traders as an additional destabilizing force during market stress conditions. Tofurther validate our findings, we study the relation between retail trading activity and volatilitysurrounding the 2008-09 financial crisis. The results are consistent with the COVID-19 periodas we find that retail traders indeed have an enhanced destabilizing role during market stressconditions.

Who participated in the GameStop frenzy? Evidence from brokerage accounts

In January 2021, the GameStop stock was the epicenter of the first case of predatory trading initiated by retail investors. We use brokerage accounts to study who participated in this GameStop frenzy and how they performed. We investigate the extent to which investors’ personal and trading characteristics differ from the general population of retail investors. GameStop traders had a history of investing in speculative instruments, including stocks with lottery-like features. They were also more likely to close their positions before the peak of the bubble. At the onset of the frenzy, numerous retail investors also shorted GameStop. Overall, our results indicate that the GameStop frenzy was not a pure digital protest against Wall Street but speculative trading by a group of retail investors, in line with their prior high-risk trading behavior.

Crude oil stock market trend reversal forecast based on Wall Street Journal articles with keyword indication

The research aims to find correlations between articles in the Wall Street Journal (WSJ) and oil price change. Exactly how much the WSJ induces, how much impact it has, or how much it predicts future trend reversals. Current speculative trading and the willingness to buy or sell following certain events have a decisive influence on stock market prices. In the case of oil, we cannot talk about purely speculative pricing, but its sensitivity to market processes and the decisions of market participants, and possibly only possible decisions, is indisputable. In this way, we search for and determine correlations based on the above.

The Rise and Fall of a Rumor: Evidence from Regional Housing Markets in China

In this paper, we examine how the enforcement and collapse of a rumor affect regional housing markets in China. Specifically, we trace the rumor that Yanjiao and Dachang, two counties in Hebei province, were to be merged into Tongzhou, a county of Beijing, and quantify the bust of housing prices when the rumor collapses. Using a difference-in-difference approach in a sample of housing units listed between 2015 -2019, we find that listing price in Yanjiao and Dachang drops by 25.1% relative to Tongzhou since local governments clarify the rumor. We further evidence that herding and speculation accelerate the price bust, and a small group of housing speculators trade the price down through the contagion effect.

Online two-way trading: Randomization and advice

We consider the following online two-way trading problem: given some amount of money and a stock (security) of fluctuating prices, we want to perform a bounded number of speculative trades so as to make the most money. We assume a global fluctuation model, where global limits on the minimum and maximum possible prices are given. Previously, optimal algorithms were established in the deterministic case. In this paper we consider two models that improve the competitiveness: randomized algorithms, and algorithms with advice. In most cases we give close to optimal upper and lower bounds on the competitive ratios.

The Impact of Public Announcements and Private Analyses on US Treasury Bonds

This article examines the informational role of trading around the announcement of 8:30 a.m. economic news in the US Treasury market, and investigates whether there is speculative trading before the US news release in the US and London markets. The current paper extends Green’s (2004) study of 5-year notes into a study of 2-, 5-, and 10-year notes, and confirms Green’s finding that the informational role of trading increases following announcements. The results indicate that the informational role of trading before the US news release is significantly greater in the London market, and that the order flow of the London market is significantly and positively related to post-announcement return when the surprise in the US economic news is high, which implies that traders trade speculatively in the London market. TOPICS:Volatility measures, developed markets, other real assets Key Findings ▪ Informed trading before the US news release is greater in the London market. ▪ Traders speculate in the London market before high-surprise US economic news. ▪ Some traders in the US Treasury market are able to forecast future price changes.

Market dynamics, cyclical patterns and market states

PurposeIn this paper, the authors seek to investigate the dynamics of Bitcoin, Litecoin, Ethereum and Ripple daily returns and volatilities.Design/methodology/approachIn this paper, the authors apply the MS-ARMA model on daily returns of Bitcoin (19/04/2013-13/02/2018), Ripple (05/08/2013-14/02/2018), Litcoin (29/04/2013-14/02/2018) and Ethereum (08/02/2015-14/02/2018). This model allows capture of the nonlinear structure in both the conditional mean and the conditional variance of cryptocurrency returns.FindingsAll the cryptocurrency markets show regime switching in the return-generating process. Market dynamics seem to be governed by two different states which differ from one cryptocurrency market to another in terms of mean return, volatility and interstate dynamics. These findings can be explained by investors’ behavior, i.e. speculative trading and herding behavior. By choosing to participate (or imitating some investors) in some cryptocurrency markets (in particular Bitcoin market), they affect the price movements and therefore the market dynamics in the short run.Practical implicationsIdentifying the different market states provides information for investors to make more accurate portfolio decisions in the virtual market and follow the market timing strategy.Originality/valueThis paper attempts to analyze potential nonlinear structure in cryptocurrencies returns and analyze if there is a difference between the cryptocurrencies market cycles. So, the search for congruent and adequate specification to reproduce the stock returns dynamics in the virtual market still remains the concern of several empirical studies. This research not only examines the behavior of stock returns in the cryptocurrencies’ market but also highlights the existence of nonlinearity propriety as a stylized fact.

Derivative use, ownership structure and lending activities of US banks

Following the 2007–2008 financial crisis, there is widespread interest in understanding how derivative use drives bank lending behavior. Our paper examines the impact of bank ownership structure on the relationship between derivative use and lending activities of U.S. banks. We find that lending recovered faster in larger banks than smaller banks post-crisis and in line with Diamond’s (Diamond DW 1984 Financial intermediation and delegated monitoring. Rev Econ Stud 51:393–414) systemic risk reduction theory, derivative use is positively associated with lending growth. Ownership is significant in explaining the magnitude of the relationship even after controlling for alternative specifications of the derivative use variable. In both normal and crisis periods, the speed of adjustment of lending to derivatives use by stock banks lags that of mutual banks. We suggest that speculative trading in derivatives substitutes for lending growth to a larger extent for stock banks compared to mutual banks. These findings may have important implications for investors and bank regulators.

Speculative trading in Bitcoin: A Brazilian market evidence

This paper tests the speculative trading in Bitcoin Brazilian market using daily data for Bitcoin spanning the 2011–2018 sample period. Two points are examined: the first is based in stylized facts about price dynamics on Brazilian market and the second implies in testing the hypothesis that speculative trading in Bitcon is resposible for its unusual volatility level. We check the existence of speculative trading in the Brazilian market based on three different experiments, broadly relevant to both market participants and academic researchers. Our results are summarized as follows: (i) The Bitcoin's bull on Brazilian market presented short duration, given the volatility exposed into period, showing signs of asymmetry in marketinformation and uncertainty; (ii) It was observed the different trajectories between volatilityand return, reflecting the high degree of speculation of the market; (iii). It was proved the ex-istence of speculative trading in Bitcoin's Brazilian market through three different experiments

The impact of options introduction on the volatility of the underlying equities: evidence from the Chinese stock markets

The impact of options introduction on the underlying equities has been a topic of interest for decades, but mixed conclusions have been obtained in various financial markets, using different sample periods and methodologies. This paper examines the impact of the introduction of SSE 50ETF options on the volatility of SSE 50ETF using four different GARCH family models. For all models, we consistently find a significant decrease of the underlying equity volatility after the options introduction, along with an improvement of information flow on the underlying equity price. Further analysis shows that the impacts of speculative and hedging option trading activities are asymmetric. While the unexpected hedging trading activities decrease the volatility of SSE 50ETF, the unexpected speculative trading activities increase the volatility. Our empirical findings based on Chinese financial markets support the theory that options introduction attracts informed traders, and improves the information flow and liquidity of the underlying equities, and consequently reduces their volatility.

Speculative trade and the value of public information

AbstractIn environments with expected utility, it has long been established that speculative trade cannot occur and that the value of public information is negative in economies with risk‐sharing and no aggregate uncertainty. We show that these results are still true even if we relax expected utility, so that either Dynamic Consistency (DC) or Consequentialism is violated. We characterize no speculative trade in terms of a weakening of DC and find that Consequentialism is not required. Moreover, we show that a weakening of both DC and Consequentialism is sufficient for the value of public information to be negative. We therefore generalize these important results for convex preferences which contain several classes of ambiguity averse preferences.