Modelling the behaviour of arbitragers and speculators in the crude oil futures market

摘要

Since the crude oil futures price peaked at $147 per barrel, the role of speculators has come under tremendous scrutiny. The rise in oil price, along with the increased participation of financial traders, led to claims that speculators are responsible for exacerbating crude oil price movements. This study attempts to assess these claims regarding speculative influences on crude oil futures price. Specifically, the study explains the determination of crude oil futures price in terms of arbitrage and speculation. For this purpose a theoretical framework is formulated in which the observed futures price is outlined as a function of the arbitrage price and expected spot price. The arbitrage price, which reflects the influence of arbitrage, is obtained by adjusting the spot price by factors that account for the cost of carry and the convenience yield. The expected spot price, which represents the role of speculation, is estimated by using various expectation formation mechanisms. To determine the relation between the observed futures price, the arbitrage price and the expected spot price of crude oil, cointegration analysis is employed. The empirical results reveal that although both arbitrage and speculation have a significant influence on futures price, arbitrage plays a dominant role in price determination. Moreover, the convenience yield effect is absent from the arbitrage process. The impact of speculation, on the other hand, varies according to the expectation formation mechanism employed and the length of the futures contract. Additionally, speculators form their expectations heterogeneously and switch between different expectation formation mechanisms on the basis of past forecasting performance. The results also show that in the build-up of oil prices after 2003, speculators remained focused on the expected profitability of their trading strategies. Overall, the findings firmly establish that financial traders impact the price dynamics of crude oil futures