Abstract
This paper studies time-varying cross-market trading activities of speculators in US currency futures market from January 1994 to September 2013. The linkages between speculative open interest in the Swiss Francs futures market and British Pound, Canadian Dollar as well as Japanese Yen futures markets are investigated for (i) total speculation (long plus short), (ii) long speculation and (iii) short speculation. A Bayesian time-varying parameter vector autoregression model is used to study changes in cross-market trading linkages over time. The empirical results present evidence of cross-market herding activities of speculators, where an increase in speculative activity in the Swiss Francs futures market leads to increases of speculative activities in the three other futures markets investigated. These cross-market linkages do not vary substantially over time.
The views expressed in this paper are the views of the authors and not necessarily those of the Deutsche Bundesbank or its staff.
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Notes
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Ederington and Lee (2002) report for example, that commercial traders in the heating oil futures market might engage in speculation as well. However, Ederington and Lee (2002) note that the non-commercials are indeed speculators who do not engage in hedging activities. Sanders et al. (2004) stress that there are no obvious incentives for traders to self-classify as a speculator. Therefore, reporting non-commercials most likely represent speculative positions.
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See Wang (2003) for a survey of the literature.
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See for example Bryant et al. (2006).
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In fact, the investigation uses data from 13 October 1992 to 17 September 2013. However, the data from 13 October 1992 to 28 December 1993 are used as a training sample to obtain starting values for the estimation algorithm.
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The time series have been checked for stationarity and cointegration. Johansen tests show that the time series in levels are not cointegrated. Augmented Dickey Fuller (ADF) test results suggest that the time series in first differences are stationary.
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Röthig, A., Röthig, A. (2014). Time-Varying Cross-Speculation in Currency Futures Markets: An Empirical Analysis. In: Dieci, R., He, XZ., Hommes, C. (eds) Nonlinear Economic Dynamics and Financial Modelling. Springer, Cham. https://doi.org/10.1007/978-3-319-07470-2_13
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