NORMAN, Okla., March 12, 2010 (GLOBE NEWSWIRE) -- Recent high-price volatility in commodity markets has renewed interest in the role and impact of traders, especially speculators, in derivatives markets, and reopened debate on the appropriate role of speculation. While many argue that speculators play a vital role in derivatives markets by bearing risk transferred from hedgers and providing market liquidity, others have argued that recent volatility was driven by excessive speculation.
In a new study, Louis Ederington and Chitru Fernando of the Michael F. Price College of Business at the University of Oklahoma and Michael Dewally of Marquette University explore one of the most fundamental issues that underlies this debate -- the extent and determinants of individual traders' trading profits in the crude oil, gasoline and heating oil futures markets -- using unique data on trades by all large traders.
Ederington, Fernando, and Dewally find that speculators in general, and hedge funds in particular, tend to have positive trading profits. However, they further find that these speculator profits are primarily due to the liquidity and risk absorption services they provide hedgers. The profits of individual traders (whether speculators or hedgers) are much higher if they take positions opposite to those of the majority of hedgers -- indicating higher profits if the trader provides liquidity and risk absorption services to hedgers. While some individual traders may have an informational or skill advantage, there is no evidence that some trader types make higher profits because they have better information or greater trading skill than other trader types, i.e., no evidence of information or trading skill differences among hedge funds, energy companies, energy marketers and pipelines, investment banks, commercial banks, households, and others.
Ederington presented their results in a talk at the Commodity Futures Trading Commission last fall. "Our results highlight the beneficial role of speculators in energy markets," he says. Fernando adds, "Our analysis provides no evidence that markets did not work as intended during the period of our study."
Ranked in the top 5 percent of all U.S. undergraduate business schools based on recent ranking data, the Price College of Business is one of the nation's premier business colleges. This year, U.S. News & World Report ranks the college's International Business program 12th in the nation and the Management Information Systems program 17th in the nation. The Entrepreneurship program was ranked 11th in the nation by Entrepreneur magazine in association with The Princeton Review and 18th in the nation by U.S. News & World Report.