“Do Birds of a Feather Flock Together? Spec­u­la­tor Herd­ing in the World Oil Mar­ket”:

Abstract: This paper looks at spec­u­la­tive behav­ior in the inter­na­tional oil mar­ket. Much of the blame for oil-​​market tur­bu­lence has been placed on spec­u­la­tors, par­tic­u­larly hedge funds. Spec­u­la­tive cap­i­tal has been char­ac­ter­ized as “hot money,” with cap­i­tal flows dri­ven by “herd­ing,” “flock­ing,” and “con­ta­gion.” Poli­cies to deal with volatil­ity by weak­en­ing, or even dis­abling spec­u­la­tion, have been based largely on anec­dote, con­ve­nience (spec­u­la­tors have long served as scape­goats for var­i­ous prob­lems), and ide­ol­ogy, rather than care­ful analy­sis. Part of the prob­lem arises from the secrecy with which spec­u­la­tors oper­ate. Because spec­u­la­tive trad­ing can­not eas­ily be observed, it is dif­fi­cult to assess spec­u­la­tors’ con­tri­bu­tion, if any, to volatil­ity. The paper uti­lizes a large, detailed data­base on indi­vid­ual trader posi­tions in crude-​​oil and heating-​​oil futures mar­kets. The paper is exploratory, with focus on mea­sur­ing and assess­ing the ten­dency of spec­u­la­tors to herd (trade in the same direc­tion as a group) and flock (trade in the same direc­tion by sub­groups of speculators).