This paper explores the impact of investor flows and financial market conditions on returns in crude oil futures markets. I argue that informational frictions and the associated speculative activity ...may induce prices to drift away from "fundamental" values, and may result in price booms and busts. Particular attention is given to the interplay between imperfect information about real economic activity, including supply, demand, and inventory accumulation, and speculative activity in oil markets. Furthermore, I present new evidence that there were economically and statistically significant effects of investor flows on futures prices, after controlling for returns in the United States and emerging-economy stock markets, a measure of the balance sheet flexibility of large financial institutions, open interest, the futures/spot basis, and lagged returns on oil futures. The largest impacts on futures prices were from intermediate-term growth rates of index positions and managed-money spread positions. Moreover, my findings suggest that these effects were through risk or informational channels distinct from changes in convenience yield. Finally, the evidence suggests that hedge fund trading in spread positions in futures impacted the shape of term structure of oil futures prices.
This paper was accepted by Wei Xiong, finance.
Many markets involve two groups of agents who interact via "platforms," where one group's benefit from joining a platform depends on the size of the other group that joins the platform. I present ...three models of such markets: a monopoly platform; a model of competing platforms where agents join a single platform; and a model of "competitive bottlenecks" where one group joins all platforms. The determinants of equilibrium prices are (i) the magnitude of the cross-group externalities, (ii) whether fees are levied on a lump-sum or per-transaction basis, and (iii) whether agents join one platform or several platforms.
In this study, a new market model is proposed to enable the smooth integration of distributed energy resources (DERs) in day-ahead (DA) and balancing (BL) markets. The DA market is a joint energy and ...reserve market. DERs participate in the local market operated by the distribution market operator (DMO) which is coordinated with the wholesale market. During local market clearing, the DMO considers the technical constraints of the distribution grid to keep the operation of the distribution grid within limits. Moreover, the DMO, through preliminary scheduling, estimates preliminary prices for energy, reserve and balancing services. These can be seen as offer prices by which the DMO will bid into the TMO DA and BL market. The uncertainty of renewable-based DERs is considered through the use of stochastic programming. The proposed market model is compared with a centralised market model. Results show that adding the distribution network constraints to the proposed market model is capable of alleviating overloading and appropriately accounting this effect in terms of increasing the operational cost. Moreover, it has been shown that the scalability of the proposed market model is higher compared to the currently applied centralised market models.
In this paper, we examine asymmetric volatility spillovers between oil and international stock markets in a vector autoregression framework using a directed acyclic graph (DAG) technique. We provide ...evidence that bad total volatility spillovers dominate the system and change over time, suggesting that a pessimistic mood and uninformed traders who tend to increase volatility dominate in markets. Positive spillovers of oil markets dominated from 2006 to mid-2009, but reversed after mid-2009. Moreover, the spillovers from good volatilities in oil markets to bad volatilities in global stock markets were significantly positive during the economic recovery period. The recent, important economic and political events have influenced asymmetries in volatility spillovers.
•Bad total volatility spillovers dominate the system and change over time.•Positive spillovers of oil markets dominated from 2006 to mid-2009, but reversed after mid-2009.•Spillovers from good volatilities in the oil market to bad volatilities in global stock markets are significantly positive after mid-2009.•Recent, important economic and political events have influenced asymmetries in volatility spillovers.
•Market innovation research studies how markets are created and transformed.•Bibliometric mapping reveals six research streams within market innovation research.•Interpretative analysis produces rich ...descriptions for the six research streams.•The literature shows shifts toward emergence, distributed agency and non-linearity.•The article uses complexity theory to outline future research directions.
Over the past three decades, a rapidly expanding academic literature has investigated how new markets are created and how existing markets are transformed, phenomena this article refers to as “market innovation”. The literature on market innovation is currently fragmented and characterized by heterogeneity of terminology, theoretical paradigms, and empirical research settings. The purpose of this article is to map the field, identify distinct research clusters, and uncover shifts in the literature’s underpinning conceptual perspectives. Specifically, using bibliometric mapping, the article identifies six clusters of market innovation research. Further analysis reveals three major shifts in the literature over time: (1) a shift from reductionism to emergence, (2) a shift from central agency to distributed agency, and (3) a shift from linearity to non-linearity. To advance the understanding of all three shifts and move theory development forward, complexity theory offers a valuable meta-theoretical framework. Future research directions are derived from complexity theory.
This study estimates the benefits that Indian farmers derive from market and weather information delivered to their mobile phones by a commercial service called Reuters Market Light (RML). We conduct ...a controlled randomized experiment in 100 villages of Maharashtra. Treated farmers associate RML information with a number of decisions they have made, and we find some evidence that treatment affected spatial arbitrage and crop grading. But the magnitude of these effects is small. We find no statistically significant average effect of treatment on the price received by farmers, crop value-added, crop losses resulting from rainstorms, or the likelihood of changing crop varieties and cultivation practices. Although disappointing, these results are in line with the market take-up rate of the RML service in the study districts, which shows small numbers of clients in aggregate and a relative stagnation in take-up over the study period.
Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that ...news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
Adaptive Markets Lo, Andrew W
2019, 2017., 20190514, 2017, 2019-04-09, 2017-04-24
eBook
A new, evolutionary explanation of markets and investor behavior
Half of all Americans have money in the stock market, yet economists can't agree on whether investors and markets are rational and ...efficient, as modern financial theory assumes, or irrational and inefficient, as behavioral economists believe. The debate is one of the biggest in economics, and the value or futility of investment management and financial regulation hangs on the answer. In this groundbreaking book, Andrew Lo transforms the debate with a powerful new framework in which rationality and irrationality coexist-the Adaptive Markets Hypothesis. Drawing on psychology, evolutionary biology, neuroscience, artificial intelligence, and other fields,Adaptive Marketsshows that the theory of market efficiency is incomplete. When markets are unstable, investors react instinctively, creating inefficiencies for others to exploit. Lo's new paradigm explains how financial evolution shapes behavior and markets at the speed of thought-a fact revealed by swings between stability and crisis, profit and loss, and innovation and regulation. An ambitious new answer to fundamental questions about economics and investing,Adaptive Marketsis essential reading for anyone who wants to understand how markets really work.
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