Title: Nonlinear intermediary asset pricing in the oil futures market
Authors: Malte Rieth - DIW Berlin (Germany) [presenting]
Anton Velinov - DIW Berlin (Germany)
Daniel Bierbaumer - DIW Berlin (Germany)
Abstract: The nonlinear trading behavior of financial intermediaries in the oil futures market is studied using structural vector autoregressions with Markov switching in heteroskedasticity. The empirical model is identified through theory and allows for regime-dependent contemporaneous effects and volatility. The results suggest that the demand curve of intermediaries steepens significantly during turbulent times, amplifying the price impact of other traders' demand shocks by two thirds. Moreover, the variance of intermediaries' own demand shocks doubles during these episodes, further raising price volatility. These findings are consistent with the hypothesis that intermediaries' funding constraints are related to volatility and imply nonlinear asset pricing.