Sunghee Choi Korea Energy Economics Institute

1. Does Investor’s Sentiment Cause Market Prices? A Case Study of the NYMEX Petroleum Futures Markets Sunghee Choi Korea Energy Economics Institute

2. 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)

3. 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

4. The One of Samples in the Journals

5. 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

6. 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

7. Behavioral Pattern of Two Investor’s Sentiment (Crude)

8. Behavioral Pattern of Two Investor’s Sentiment (Heating Oil)

9. Behavioral Pattern of Two Investor’s Sentiment (Unled. Gas)

10. 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: Risk-Bearing * Hedging-Pressure Theory

11. Correlation b/w Speculator & Hedger

12. Statistics of Investor’s Sentiment

13. 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

14. Results for β (1996 – 2006) • It is insignificant estimated that this week sentiment affects upcoming price movements in the NYMEX petroleum futures mkt.

15. 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

16. Result for βwhen the sentiment is over the average level • Still INSIGNIFICANT!

17. Result for βafter the year of 2004 • Still INSIGNIFICANT!

18. Granger Causality Test • More precise check on a causal relation

19. 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

20. Causality Result on the impact of sentiment on upcoming price movements (higher than the average level) Causality test also yields insignificant impact of sentiment on subsequent price movements

21. Causality Result on the impact of sentiment on upcoming price movements (after 2004) Causality test also yields insignificant impact of sentiment on subsequent price movements

22. Causal impact of prices on upcoming sentiment (1996 ~ 2006) Causality test also yields SIGNIFICANT impact of price on subsequent sentiment

23. Causality Result on the impact of sentiment on upcoming price movements (over the normal level) Causality test SIGNIFICANT impact of Price on subsequent sentiment

24. Causality Result on the impact of sentiment on upcoming price movements (after 2004) Causality test SIGNIFICANT impact of Price on subsequent sentiment

25. 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

26. 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?

27. Thank you for your attention Comments Welcomed