Investor Sentiment, Traders' Behavior and Price Efficiency in Crude Oil Futures Markets
This article examines the trading behavior and performance of hedgers (i.e., producers, merchants, processors, or
users of the commodity) and speculators (i.e., commodity pool operators, trading advisors, or hedge funds) in crude oil futures
markets during 2006-2012. Using weekly Disaggregated Commitments of Traders (DCOT) reports from U.S. Commodity
Futures Trading Commission, we could classify the trading positions of producers, swap dealers, money managers, and other
reportable traders in crude oil futures markets. To find the impact of these four types of traders’ positions on price efficiency,
we adopt the pricing error approach of Hasbrouck (1993) to evaluate price efficiency, in accordance with the works of
Boehmer and Kelley (2009) and Kurov (2008). This paper finds that speculators in oil futures markets belong to positive
feedback traders—they buy when prices rise and sell when prices fall; speculators’ trading behavior is related with market
sentiment. However, speculators’ positions have positive impacts on price efficiency, because speculators correct pricing
errors. These findings in this study highlight the role of different type of traders on price formation processes in oil
futures—information that is beneficial to academics, practitioners, and regulators.
Keywords: Crude oil futures, Hedge fund, Swap dealers.