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Review of Derivatives Research

Erschienen in:

19.04.2017

Did crisis alter trading of two major oil futures markets?

verfasst von: Iman Adeinat, Naseem Al Rahahleh, Peihwang Wei

Erschienen in: Review of Derivatives Research | Ausgabe 1/2018

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Abstract

The paper analyzes how traders in two major oil futures markets: New York Mercantile Exchange (NYMEX) and Intercontinental Exchange, reacted to the 2008 financial crisis, particularly whether they shifted their trading pattern and whether the relative information role of the two markets changed. Using trade-by-trade data, the paper analyzes several trading characteristics including trading volume, trade size, volatility, bid–ask spread, and relative information share. On average, NYMEX is characterized by greater volume, trade size and slightly greater spread. Before the crisis, NYMEX leads the process of price discovery, and volatility and trade size are significant factors explaining this leadership. However, following the financial crisis of 2008, the leadership role of NYMEX declines and trade size and volatility are no longer significant factors. Contrary to results of most equity market research, bid–ask spread is not a significant factor in information share and causality tests indicate that causality runs from spread to information share before the crisis but the opposite holds during the crisis period.

Vorheriger Artikel A multivariate stochastic volatility model with applications in the foreign exchange market

Nächster Artikel The determinants of CDS spreads: evidence from the model space

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During 2008–2009, the West Texas Intermediate (WTI) light, sweet crude oil futures traded on the NYMEX electronic trading platform and the Brent crude oil futures traded on ICE were ranked the first and the second, respectively, among the top 20 energy futures and options traded in the world.

For stock, stock option, and index options, they use the bid–ask spread as proxy for liquidity. For the S&P 500 index futures data, they used the Smith and Whaley (1994) method of moments spread estimator from time and sales data as proxy for liquidity.

French and Roll (1986) compare volatility during trading and nontrading periods. They find that the volatility during nontrading periods is much lower than that in trading periods. Since information also arrives in nontrading periods, their empirical results suggest that trading generates volatility.

These markets include: WTI far month futures of U.S., WTI near month futures of U.S., WTI spot of U.S., Brent far month futures of London, Brent near month futures of London, Brent spot of London, Dubai near month futures of United Arab Emirates (UAE), Dubai spot of UAE, Bonny spot of Nigeria, and Maya spot of Mexico.

Hasbrouck (2009) estimates the correlation between Gibbs effective transaction costs for daily CRSP data and the bid–ask spread estimates from high-frequency Trade and Quote Database data over a time period (1993–2005) and finds a high correlation of 0.965 over a time period (1993–2005).

Since the paper includes all low trading hours such as midnight, that might explain the small average trade size and low number of trades in Table 1.

For the sake of brevity, details of both ADF and cointegration results are not shown.

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Titel: Did crisis alter trading of two major oil futures markets?
verfasst von: Iman Adeinat
Naseem Al Rahahleh
Peihwang Wei
Publikationsdatum: 19.04.2017
Verlag: Springer US
Erschienen in: Review of Derivatives Research / Ausgabe 1/2018
Print ISSN: 1380-6645
Elektronische ISSN: 1573-7144
DOI: https://doi.org/10.1007/s11147-017-9133-7