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U.S. Energy Futures Markets: Liquidity and Optimal Speculative Position Limits

Title:

U.S. Energy Futures Markets: Liquidity and Optimal Speculative Position Limits

Cheng, Peiran (2012) U.S. Energy Futures Markets: Liquidity and Optimal Speculative Position Limits. Masters thesis, Concordia University.

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Abstract

U.S. energy prices have grown dramatically since the 2007 financial crisis. Speculators are blamed for market manipulation, and regulators seek additional tools to control the market. Given the growing roles of liquidity and position limits in finance along with recent Wall Street legislation changes made by the Dodd-Frank Act, we carry out studies to test how effectively price impact liquidity measures measure liquidity, whether position limits have impacts on market liquidity, and how optimal speculative position limits should be modeled, based on microstructure theories. Using the major New York Mercantile Exchange (NYMEX) energy futures data from Bloomberg, we compare low-frequency liquidity proxies with high-frequency liquidity benchmarks, run an event study on futures contracts’ liquidity following the launching of the Dodd-Frank Act, and develop a theory-based position limits model. Our empirical results indicate that the new price impact liquidity proxy developed in this thesis is more effective in measuring liquidity than the Amihud (2002) proxy. Further, contrary to Grossman's (1993) finding, position limits on financial futures do not force traders to move to foreign substitute markets. Finally, position limits for single commodity derivatives should be based on corresponding underlying spot market factors, and strong fluctuations in optimal position limits over time suggest that exchanges should update position limits on a high-frequency basis.

Divisions:Concordia University > John Molson School of Business > Finance
Item Type:Thesis (Masters)
Authors:Cheng, Peiran
Institution:Concordia University
Degree Name:M. Sc.
Program:Administration (Finance option)
Date:August 2012
Thesis Supervisor(s):Shanker, Latha
Keywords:Position limits, Energy, Liquidity.
ID Code:974615
Deposited By:PEIRAN CHENG
Deposited On:30 Oct 2012 14:16
Last Modified:30 Oct 2012 14:16
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