Speculative Trading Activities Research Articles

Market efficiency and information flow between the crude palm oil and crude oil futures markets

This study analyzes the efficiency of the crude palm oil (CPO) futures market by conducting a variance ratio test and comparing it to the West Texas Intermediate (WTI) futures market. We discover that the weak-form efficient market hypothesis holds for both the CPO and WTI futures markets despite the significant difference in their liquidity. Using a scaling exponent, we investigate speculative trading activities and find that trading CPO futures in expectation of significant returns does not strongly involve a high level of risk unlike WTI futures. Our findings regarding market efficiency of the two futures markets are supported by the significant integration of the two with similar level of information flow from each market to the other. To explore the role of speculation in their market integration, we introduce a natural experimental setting using the coronavirus disease 2019 (COVID-19) pandemic, which caused a sudden decrease in the demand for fuel. The bidirectional information flow between the two markets is intensified after the COVID-19 pandemic due to lower level of speculation. The findings suggest that (i) stakeholders in the CPO market need to pay attention to the crude oil markets to anticipate its price changes, (ii) investors can use WTI futures as a hedging tool against CPO futures as long as there is mutual information flow, and (iii) regulators should carefully implement new CPO futures market policy, as either asymmetric changes in speculation or unbalanced regulation with the WTI futures market can create market distortion and regulatory arbitrage.

FİNANSAL ARACILIĞIN ASLÎ İŞLEV VE FAALİYETLERİNE GERİ DÖNDÜRÜLMESİ

Financial intermediation is a vital function that permits money circulation by getting it from surplus units in the economy and giving it to deficit units. Unfortunately, intermediary institutions deviated from this essential function and indulged in speculative trading activities using, in the process, a complex of debt instruments which are mute (unable to create added value) by nature. In contrast, Islamic finance ideas offer ways to bring financial intermediation back to focus on its original function of channeling resources from the liquidity fluent economic units to the liquidity hungry units. This paper aims to explore the economic advantages of applying principles such as using financial instruments of sale, lease, and sharing instead of the debt-based instrument of interest lending, especially in confining financial institutions to supporting the real economy through activities of financial intermediation and preventing them from going away from this fundamental function. This is in addition to the economic advantages of incorporating ethical values in the activities of financial institutions, which make financial transactions strictly associated with what is beneficial to human welfare. This paper takes a theoretical analysis approach and is based on secondary information through financial literature, papers, and articles.

The prohibition of speculation in Islamic finance: fairness and framing

PurposeThis paper aims to present a simple behavioural explanation of the prohibition of speculation in Islamic finance.Design/methodology/approachThis paper proposes a theoretical model that describes how investors from low income strata of the society may be prone to make sub-optimal decisions when they compare their outcome from a speculative trading activity to that of the counterparty to the trade and perceive inequity to exist.FindingsWhen individuals from low income strata of the society compare their current situation with the average income of the society, they perceive themselves to be in a loss. This creates a loss frame within which they then evaluate all future outcomes. When such individuals invest in speculative trading activities and incur a loss, they compare their outcome from the trade to that of the counterparty to the trade. As speculative trades are a zero sum game, the counterparty makes an equivalent gain from the trade. Thus, the comparison leads to a perception of inequity. This perception of inequity is aggravated by the loss frame within which the investor is operating. The aggravated inequity aversion may then motivate the investor to make further sub-optimal decisions like repeated speculative trading activities. The Islamic prohibition on speculative trading activities may serve to protect low income investors from entering into such cycles of sub-optimal decisions.Originality/valueThis paper offers a unique explanation of why day trading and short selling may be prohibited in Islamic capital markets.

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.

Speculation and corn prices

ABSTRACTIt is commonly asserted that speculative trading activities are largely behind the high and volatile food commodity price behaviour since 2006. In this article, we revisit this hypothesis by investigating how different speculative measures affect our conclusion on the role of speculation. Four speculative measures are considered, including index trading activities, non-commercial net long positions, Working’s speculative index, and an excessive speculative volume index. These four measures imply different underlying hypotheses about the role of speculation on commodity price movements and encompass most of the measures used in the recent literature on the role of speculation in commodity markets. Using a structural vector autoregressive (SVAR) model, we show a mixed impact of speculative trading on corn prices depending on the measure used. While shocks to index trading activities and excess speculation as measured by Working’s T have either zero or negative impact on corn prices, a positive shock to non-commercial net positions or the Tadesse index significantly increases the price of corn. However, the magnitude of the impact is not large, at most about $0.30 per bushel in real terms. Our findings are robust to structural breaks, alternative ordering of variables, and an alternative specification of the model.

Agricultural Commodity Trading: Is it Destabilizing Spot Markets?

Executive Summary The future trading has been held responsible by certain political and interest groups of enhancing speculative trading activities and causing volatility in the spot market, thereby further spiralling up inflation. This study examines the effect of future of trading activity on spot market volatility. The study first determined the Granger causal relationship between unexpected future trading volume and spot market volatility. It then examined the Granger causal relationship between unexpected open interest and spot market volatility. The spot volatility and liquidity was modelled using EGARCH and unexpected trading volume. The expected trading volume and open interest was calculated by using the 21-day moving average, and the difference between actual and expected component was treated as the unexpected trading volume and unexpected open interest. Empirical results confirm that for chickpeas ( channa), cluster bean ( guar seed), pepper, refined soy oil, and wheat, the future (unexpected) liquidity leads spot market volatility. The causal relationship implies that trading volume, which is a proxy for speculators and day traders, is dominant in the future market and leads volatility in the spot market. The results are in conformity with earlier empirical findings — Yang, Balyeat and Leathan (2005) and Nath and Lingareddy (2008) —that future trading destabilizes the spot market for agricultural commodities. Results show that there is no causal relationship between future open interest and spot volatility for all commodities except refined soy oil and wheat. The findings imply that open interest, which is a proxy of hedging activity, is leading to volatility in spot market for refined soy oil and wheat. The results are in conformity to earlier empirical studies that there is a weak causal feedback between future unexpected open interest and volatility in spot market ( Yang et al., 2005 ). For chickpeas (channa), the increase in volatility in the spot market increases trading activity in the future market. The findings are contrary to earlier empirical evidence ( Chatrath, Ramchander, & Song, 1996 ; Yang et al., 2005 ) that increase in spot volatility reduces future trading activity. However, they are in conformity to Chen, Cuny and Haugen (1995) that increase in spot volatility increases future open interest. The results reveal that the future market has been unable to engage sufficient hedging activity. Thereby, a causal relationship exists only for future trading volume and spot volatility, and not for future open interest and spot volatility. The results have major implications for policymakers, investment managers, and for researchers as well. The study contributes to literature on price discovery, spillovers, and price destabilization for Indian commodity markets.

Cheap IPO: Does it matter?

It can be argued that a cheaply priced IPO would attract more potential buyers, especially small or retail investors as they are commonly known in Malaysia, which could result in more speculative trading activities due to its “cheap” perception. A fixed-price IPO serves a unique situation in which the price of an IPO is fixed prior to its offering to potential buyers, and it gives the opportunity to test whether or not a cheaply priced IPO can attract more potential buyers which can result in more speculative trading activities, hence higher initial return and price spread. This study examines a sample of 104 Malaysian fixed-price IPOs from January 2009 to December 2014, where I test the relationship between cheaply priced IPOs and their initial returns and also their price spreads during the first day of trading. I hypothesize that a cheaply priced IPO will attract more potential investors (especially the small or retail investors) that will result in a more speculative trading activity that will later push the IPO price higher in the secondary market. A speculative trading activity will also result in a higher price spread, which refers to the difference between the highest and the lowest price. The same situation occurs with regard to trading board, where investors (especially retail investors) are usually more attracted to cheaply priced IPOs, which are associated with IPOs listed on the ACE Market of Bursa Malaysia which caters for small, young and technology companies. As noted by Lowry et al. (2010), IPOs of small, young and technology firms are more difficult to value due to higher information asymmetry between the issuer and the investors, and thus we would expect higher price spread in these IPOs. In general, the results show that IPOs with low offer price and IPOs listed on the ACE Market have higher initial returns and higher price spreads compared to IPOs with high offer price and IPOs listed on the Main Market. The result of this study implies that investors can benefit significantly from investing in IPOs with low offer price. Investors can also benefit from investing in IPOs listed on the ACE Market, which is associated with low-priced IPOs. The implication to the regulatory bodies of Bursa Malaysia is that they should pay closer attention to IPOs with low offer price, and IPOs listed on the ACE Market because these IPOs are subject to speculative trading activities.

Private Sector Influence on the U.S. Regulatory Process: A Study of the Volcker Rule

In 2008, the world witnessed the outcome of 30 years of deregulation in the global financial sector. In response to public outrage over bank bailouts, the U.S. Congress passed the Volcker Rule in order to limit risky speculative trading activities of banks. However, the Volcker Rule, in its final version, was watered down substantially by private sector actors such as banks, financial institutions, and trade associations. The purpose of this paper is to present empirical research showing how private sector actors’ in the U.S. influence financial regulation, using the Volcker Rule as an example. The examination of the data shows correlations between private sector actors methods’ of influence (lobbying expenditures, access to regulators and market share) and their rates of success with their requested changes made during the comment period of the proposed rule and those incorporated in the final version issued by regulators.

Retail investor information demand – speculating and investing in structured products

We study the impact of retail investor information demand on trading in bank-issued investment and leverage structured products, which are specifically designed for retail investors. Stock-specific information demand positively predicts speculative trading activity. Furthermore, we find a positive relationship between market-wide information demand and order aggressiveness and order uncertainty for speculating and investing activity. Whereas information supply is associated with speculative long positions, information demand does not induce investors to be predominantly long or short. Finally, we do not find retail investor information demand to contribute to an upward price pressure on security prices. In contrast, information supply exerts negative price pressure. Overall, retail investor trading in individual stocks is much more strongly influenced by market-wide information demand instead of firm-specific information demand. This implies a low informational efficiency of retail investor speculation and investing activity.

Retail Investor Information Demand - Speculating and Investing in Structured Products

We study the impact of retail investor information demand on trading in bank-issued investment and leverage structured products, which are specifically designed for retail investors. Stock-specific information demand positively predicts speculative trading activity. Further, we find a positive relationship between market-wide information demand and order aggressiveness and order uncertainty for speculating and investing activity. Whereas information supply is associated with speculative long positions, information demand does not induce investors to be predominantly long or short. Finally, we do not find retail investor information demand to contribute to an upward price pressure on security prices. In contrast, information supply exerts negative price pressure. Overall, retail investor trading in individual stocks is much more strongly influenced by market-wide information instead of firm-specific information demand. This implies a low informational efficiency of retail investor speculation and investing activity.

CROSS‐SPECULATION IN CURRENCY FUTURES MARKETS

ABSTRACTThis paper studies cross‐market herding of speculators in the Canadian dollar, Swiss francs, British pound and Japanese yen futures markets from 6 October 1992 to 26 January 2010. The relations between (i) total speculation (long plus short), (ii) long speculation and (iii) short speculation are investigated. The empirical results present strong evidence of short‐run causal relationships between speculative activities in currency futures markets. There is a significant feedback effect (bidirectional causality) between each pair of total speculation. In addition, impulse response analysis points to positive interrelations between speculative trading activity and therefore to cross‐market herding. Copyright © 2011 John Wiley & Sons, Ltd.

Speculators, Prices and Market Volatility

We employ data over 2005-2009 which uniquely identify categories of traders to test whether speculators like hedge funds and swap dealers cause price changes or volatility. We find little evidence that speculators destabilize financial markets. To the contrary, speculative trading activity largely reacts to market conditions and reduces volatility levels, consistent with the hypothesis that speculators provide valuable liquidity to the market. These results hold across a variety of products and suggest that hedge funds (with approximately constant risk tolerance as in Deuskar and Johnson [2010]) improve overall market quality.

The impact of speculative trading activities on the speculative market: a case of Taiwan stock index futures market

This article investigates the behaviour of speculative trading activities for the speculative market at the Taiwan stock index futures (TX futures) over the period 1 January 2000 to 31 October 31 2007. By testing the impact of contemporaneous (lagged) speculative trading activities for futures return and conditional volatility, we examine tax and seasonal effects for speculative trading activities. Our empirical results reveal a positive relationship of contemporaneous speculative trading activities for daily futures return and conditional volatility, and a negative relationship of lagged speculative trading activities and conditional return volatility. Furthermore, we incorporate speculation ratio into Glosten, Jagannathan and Runkle-Generalized Autoregressive Conditional Heteroscedastic (GJR-GARCH) model and find asymmetric volatility in conditional return of TX futures. In addition, evidence shows that speculative trading activities significantly increased in the period following the reduction in the r...

Is Speculation Destabilizing?

The possibility that speculative trading destabilizes or creates a volatile market is frequently debated. To test the hypothesis that speculative trading is destabilizing we employ a unique dataset from the U.S. Commodity Futures Trading Commission (CFTC) on individual positions of speculators. While others have used a more aggregated version of our data, here we test, for the first known time, whether speculators cause, in a forecasting sense, price movements and volatility in futures markets and, therefore, destabilize markets. Our findings provide evidence that speculative trading in futures markets is not destabilizing. In particular, speculative trading activity reduces volatility levels.

An investigation of the relationship between bond market volatility and trading activities: Korea treasury bond futures market

This study proposes a new proxy variable for the speculative trading activities in the analysis of relationship between volatility and trading activities. With the new variable, the dynamic interaction among underlying bond market volatility, futures trading volume, open interest and speculation ratio in Korea treasury bond and futures markets is examined under the vector autoregressive analysis (VAR) framework. A positive relationship is found between the bond market volatility and the speculation ratio. The result implies that the new variable could be a good candidate, reflecting the speculative trading activities in derivative markets.

An investigation of the relationship between bond market volatility and trading activities: Korea treasury bond futures market

This study proposes a new proxy variable for the speculative trading activities in the analysis of relationship between volatility and trading activities. With the new variable, it examines the dynamic interaction among underlying bond market volatility, futures trading volume, open interest and speculation ratio in Korea treasury bond and futures markets under the vector autoregressive analysis (VAR) framework. A positive relationship is found between the bond market volatility and the speculation ratio. The result implies that the new variable could be a good candidate, reflecting the speculative trading activities in derivative markets.

Trading Risk and Volatility in Interest Rate Swap Spreads

This paper examines how risk in trading activity can affect the volatility of asset prices. We look for this relationship in the behavior of interest rate swap spreads and in the volume and interest rates of repurchase contracts. Specifically, we focus on convergence trading, in which speculators take positions on a bet that asset prices will converge to normal levels. We investigate how the risks in convergence trading can affect price volatility in a form of positive feedback that can amplify shocks in asset prices. In our analysis, we see empirical evidence of both stabilizing and destabilizing forces in the behavior of interest rate swap spreads that can be attributed to speculative trading activity. We find that the swap spread tends to converge to a long-run level, although trading risk can sometimes cause the spread to diverge from that level.

The impact of speculative trading on stock return volatility: the evidence from Taiwan

In this article we take advantage of the market characteristics of Taiwan to examine the empirical evidence on the impact of speculative trading on return volatilities, in regard to the existing contrasting theories and limited empirical studies. Our results suggest that characterizations of speculative trades predicted by contrasting theories may exist in the market at the same time. The evidence indicates, consistent with the inventory hypothesis, that speculative trading activities through day trades increase the intraday price volatility and tend to exacerbate such volatility if the price rises on a particular day. An increasing level of margin debt, which measures the accumulative speculative trades, is, however, found to stabilize the market, thus, supporting the rational speculation hypothesis. We also find evidence of a significantly positive impact on return volatility as trading volume increases and as a response to the 1997 Asian financial crisis.

Lead-lag associations between option trading and cash market volatility

The paper examines the relationships between the OEX trading volume and interday and intraday trends in the corresponding S&P100 cash index for the 11-year interval, February 1984 to April 1995. The evidence is consistent with the notion that option trading has a stabilizing impact on cash markets. Specifically, interday and intraday volatility is found to decline following increased option trading activity. This pattern is documented for total option trading activity, speculative trading activity, and across option trading activities broken down by put and call volume. Patterns of causality from cash markets to option trading are not as evident