Download Investor Sentiment and Price Predictability in the Oil Future Market

Does Investor’s Sentiment
Cause Market Prices? A
Case Study of the NYMEX
Petroleum Futures Markets
Sunghee Choi
Korea Energy Economics Institute
Market Reaction to Sentiment

“What is important in market fluctuations are not the
events themselves, but the human reactions to those
event.” (B. Baruch(1958)’s description on the stock
market)

“Speculators keep oil prices afloat….Many analysts
agree this due in large part to the amount of
speculative investment money pouring into the
market.” (CNNMoney Jan. 2007)
Why the Oil Market?
The NYMEX crude oil futures
- Daily net positions in nearby contracts that
expire within 3 month have grown by 145
percent from 2000 to 2006
- Those in long-term contracts that expire in
three years or more have increase around 262
percent over the same period time
 The crude prices persistently increase over the
period

The One of Samples in the Journals
The Research Objective

Need to empirically check the recent
interaction between investor’s sentiment and
price movements for the NYMEX petroleum
futures markets using a formal methodology
- Establishment investor’s sentiment index for
three major petroleum futures markets
- Causality test b/w sentiment and prices
SI 
j
it
 
max  S   min  S 
Sitj  min Sitj
j
it
j
it
Investor’s Sentiment Index (SI)
- Sit: the aggregate position for investor type “i”
(speculator, hedger) at week “t”
- Aggregate position:
“long open interest – short open interest,” which is from
the COT data published by CFTC
☞ This index shows growth of the net long position
for each investor
Behavioral Pattern of Two
Investor’s Sentiment (Crude)
150000
Speculator
Hedger
100000
50000
0
-50000
-100000
-150000
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Behavioral Pattern of Two
Investor’s Sentiment (Heating Oil)
40000
Speculator
Hedger
30000
20000
10000
0
-10000
-20000
-30000
-40000
-50000
-60000
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Behavioral Pattern of Two
Investor’s Sentiment (Unled. Gas)
60000
Speculator
Hedger
40000
20000
0
-20000
-40000
-60000
-80000
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Behavioral Characteristics of the
Major Futures Market Investors

Hedgers’ Sentimental Behavior
- Tend to be out of the Bullish market: Risk-Averse

Speculators’ Sentimental Behavior
- Tend to be investing more in Bullish market: RiskBearing
* Hedging-Pressure Theory
Correlation b/w Speculator & Hedger
Crude Oil
Correlation
-0.94
Heating Oil Unleaded
Gasoline
-0.93
-0.90
Statistics of Investor’s Sentiment
Rt j K   i j  i j SI itj   itj
Simple Linear Regression to
analyze a relation between
sentiment and upcoming prices




R: Returns in the market price at week t
K: subsequent week (k=1; 1-week later, k=2;
2-week later, k=4; 4-week later, k=6; 6-week
later)
SI: Sentiment Index at week t
i: Speculator or Hedger
Results for β (1996 – 2006)

It is insignificant estimated that this week sentiment
affects upcoming price movements in the NYMEX
petroleum futures mkt.
Additional Analysis for a More
Rigorous Check


It is more likely to happen that sentiment
affect upcoming price movements when the
market sentiment is bullish rather than when
the market sentiment is normal
Examining when the sentiment is suspected
to be bullish
- Retrieve sentiment level that is higher than
the average level over the sample period
- Examine the period after the year of 2004
Result for β when the sentiment
is over the average level

Still INSIGNIFICANT!
Result for β after the year of 2004

Still INSIGNIFICANT!
Granger Causality Test

More precise check on a causal relation
Causality Result on the impact of
sentiment on upcoming price
movements (1996 ~ 2006)
Causality test also yields insignificant impact of
sentiment on subsequent price movements
Causality Result on the impact of sentiment on
upcoming price movements (higher than the
average level)
Crude oil
Unleaded
Gasoline
Heating oil
11, 1
11, 1
11, 1
0.18771
0.973001
0.10174
(m, n)
11, 1
11, 1
11, 1
p value
0.31664
0.90528
0.08538
Investor category
(m, n)
Bullish
Speculators
Bullish
Hedgers
a
p value
b
Causality test also yields insignificant impact of
sentiment on subsequent price movements
Causality Result on the impact of
sentiment on upcoming price
movements (after 2004)
Crude oil
Unleaded
Gasoline
Heating oil
11, 1
11, 1
11, 1
0.20941
0.99648
0.10432
(m, n)
11, 1
11, 1
11, 1
p value
0.33813
0.93324
0.09545
Investor category
(m, n)
a
Speculators
p value
b
Hedgers
Causality test also yields insignificant impact of
sentiment on subsequent price movements
Causal impact of prices on
upcoming sentiment (1996 ~ 2006)
Crude oil
Unleaded
Gasoline
Heating oil
11, 1
11, 1
11, 1
0.00017
0.00037
0.00027
(m, n)
11, 1
11, 1
11, 1
p value
0.00015
0.00068
0.00028
Investor category
(m, n)
a
Speculators
p value
b
Hedgers
Causality test also yields SIGNIFICANT impact of price
on subsequent sentiment
Causality Result on the impact of
sentiment on upcoming price
movements (over the normal level)
Crude oil
Unleaded
Gasoline
Heating oil
11, 1
11, 1
11, 1
0.00011
0.00022
0.00018
(m, n)
11, 1
11, 1
11, 1
p value
0.00007
0.00042
0.00019
Investor category
(m, n)
a
Bullish
Speculators
p value
b
Bullish
Hedgers
Causality test SIGNIFICANT impact of Price on
subsequent sentiment
Causality Result on the impact of
sentiment on upcoming price
movements (after 2004)
Crude oil
Unleaded
Gasoline
Heating oil
11, 1
11, 1
11, 1
0.00025
0.00082
0.00033
(m, n)
11, 1
11, 1
11, 1
p value
0.00018
0.00095
0.00012
Investor category
(m, n)
a
Speculators
p value
b
Hedgers
Causality test SIGNIFICANT impact of Price on
subsequent sentiment
Conclusions
It is not empirically supported that sentiment affect the
subsequent price movements in the NYMEX
petroleum futures markets
 It is empirically supported that price affect the
subsequent sentiment in the NYMEX petroleum
futures markets
 Hedging-pressure theory explaining the below is not
supported in the NYMEX petroleum futures markets
- Hedgers Sentiment predicts Price Reversals
- Speculators Sentiment predicts Price Continuation
 Price is the good information for deciding investment
positions using the weekly COT data
- The results support that NYMEX petroleum futures
market Hedgers Sentiment is efficient enough

Limit and Further Studies
Weekly-base analysis might be limited for
finding animal spirit in the futures markets
- Daily or hourly data are needed!
 Microstructure analysis
- How about the market is going to closing
time within a day?

Thank you for your attention
Comments Welcomed