Title: Crude oil price movements and institutional traders
Authors: Celso Brunetti - Bocconi University and Federal Reserve Board (United States) [presenting]
Jeffrey Harris - American University (United States)
Abstract: The role of hedge fund, swap dealer and arbitrageur activity in the crude oil market is analyzed. Using confidential position data on institutional investors, we first analyze the linkages between trader positions and fundamentals. We find that these institutional positions reflect fundamental economic factors. Subsequently, we adopt a Markov regime-switching model with time varying probabilities and find institutional positions contribute incrementally to the probability of regime changes displaying the synchronization patterns modeled previously. Conditioning on hedge fund activity and arbitrageur activity significantly improves our probability estimates, demonstrating that institutional positions can be useful in determining whether price trends resembling bubble patterns will continue or reverse.