Abstract

Speculative activity is often claimed to be the cause of high price and turmoil in the crude oil futures market. We use Working's T and a new speculative index to measure the degree of speculation in the crude oil futures market. We find that the variation in the volatility of the crude oil futures market can be explained by the variation in the speculative index, but the economic significance of this relationship is quite low. Granger causality tests show that changes in the degree of speculation lead to changes in volatility in the crude oil futures market, but reverse relationship does not hold. In addition the causality effect is weak. After the Commodity Futures Modernization Act was enacted, speculative activity played a more important role in explaining futures market volatility, and other fundamental factors' explanatory power decreased significantly.