Speculation and Return Volatility: Evidence from the WTI Crude Oil Market

Abstract

Based on the data of the Commitments of Traders reports from 2000 to 2013, this paper investigates the impact of speculative futures trading on the return volatility of WTI crude oil. The threshold GARCH specification associated with proxies and dummy variables is employed to measure the crude oil return volatility. The Granger-causality tests and impulse response analysis are used to estimate the influence of speculative futures trading on the spot return volatility of crude oil through Vector of Autoregression technique. The results from the TGARCH model indicate that the onset of futures trading reduces the conditional volatility of oil returns by 30.6%. The results further indicate that there is a lead-lag relationship between speculators’ positions change and the oil return volatility, but the Granger-causality does not exist for the opposite direction. The results also suggest that a sudden change in speculators’ positions does not contribute a large shock on forecasting the future changes in oil spot return in an economic sense, followed by impulse response analysis.