The state-dependent trading behavior of banks in the oil futures market.

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Date: Nov. 2021
Publisher: Elsevier B.V.
Document Type: Report; Brief article
Length: 316 words

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Keywords Asset pricing; Trading behavior; Financial institutions; Vector autoregressions; Market microstructure; Oil markets Abstract We study the state-dependent trading behavior of financial institutions in the oil futures market, using structural vector autoregressions with Markov switching in heteroskedasticity. We consider two states of the world: tranquil and turbulent. We decompose the observable time-varying price volatility during the period 2006M6--2016M5 into changes in the slopes of traders' demand curves and into changes in the variability of their demand shocks. We find that the downward-sloping demand curve of intermediaries steepens significantly during crises times and that the variance of their demand shocks doubles. These findings suggest that the futures pricing of financial institutions is highly nonlinear and raises the hedging costs of producers and consumers of oil when volatility is high. Author Affiliation: (a) Humboldt Universität zu Berlin, Germany (b) Martin-Luther-Universität Halle-Wittenberg, Department of Economics, Halle 06099, Germany (c) DIW Berlin, Germany * Corresponding author at: Martin-Luther-Universität Halle-Wittenberg, Department of Economics, 06099 Halle, Germany. Article History: Received 9 April 2020; Revised 1 March 2021; Accepted 20 September 2021 (footnote)[white star] We are thankful to two anonymous referees, Christiane Baumeister, Kahild ElFayoumi, Marcel Fratzscher, Lutz Kilian, Gary Koop, Philipp König, Helmut Lütkepohl, Gert Peersman, Barbara Rossi, Simon Rother, Gregory Thwaites as well as participants of the Empirical Macroeconomics Workshop at Freie Universität Berlin 2016, the Nordic Econometric Meeting 2017 Tartu, the Annual Meeting of the Nationalökonomische Gesellschaft Österreichs 2017 Vienna, the Energy and Commodity Finance Conference 2017 Oxford, the Conference of the International Association for Applied Econometrics 2017 Sapporo, the Annual Meeting of the Verein für Socialpolitik 2017 Vienna, the Quantitative Economics Seminar of University Hamburg 2017, the International Conference on Computational and Financial Econometrics London 2017, the Conference of the International Association for Applied Econometrics 2018 Montreal, and DIW research seminars for helpful comments and suggestions. Byline: Daniel Bierbaumer [bierbaumer.daniel@gmx.at] (a), Malte Rieth [mrieth@diw.de] (*,b,c), Anton Velinov [avelinov@diw.de] (c)

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Gale Document Number: GALE|A683640151