THE IMPACT OF INVESTOR SENTIMENT ON TRADING BEHAVIOR AND MARKET STABILITY IN ENERGY FUTURES
Abstract
This study explores the impact of investor sentiment on trading behavior and market stability in energy futures, with a specific focus on crude oil futures. Using weekly trading position data from the Disaggregated Commitments of Traders (DCOT) reports and sentiment data from the American Association of Individual Investors (AAII), we analyze how different market participants—producers, swap dealers, money managers, and other reportable traders—respond to shifts in investor sentiment. Employing a Vector Autoregression (VAR) model, we find that positive changes in sentiment lead speculators, particularly money managers, to increase their long positions, thereby amplifying price volatility. In contrast, swap dealers exhibit counter-cyclical trading, reducing their positions as sentiment rises, which stabilizes the market over time. The results highlight the dual influence of investor sentiment: while speculators intensify short-term price fluctuations, swap dealers mitigate this volatility through negative feedback trading. These findings have important regulatory implications, suggesting that targeted measures, such as position limits, could help control sentiment-driven volatility in energy futures. The study contributes to a deeper understanding of sentiment’s role in financialized commodities, offering insights valuable for policymakers and market participants aiming to maintain stability in volatile markets.
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