Modelling futures price volatility in energy markets: Is there a role for financial speculation?

This paper models volatility in four energy futures markets, adopting GARCH models. The variance equation is enriched with alternative measures of speculation, based on CFTC data: the market share of non-commercial traders, the Working's T index, and the percentage of net long positions of non-commercials over total open interest in future markets. It also includes a control for market liquidity. We consider four energy commodities (light sweet crude oil, heating oil, gasoline and natural gas) over the period 2000-2014, analysed at weekly frequency. We find that speculation presents a negative and significant sign. The robustness exercise shows that: i) results remain unchanged through different model specifications (GARCH-in-mean, EGARCH, and TARCH); ii) results are robust to different specifications of the mean and variance equation.