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

- We model futures price volatility in four energy markets: crude oil, heating oil, gasoline and natural gas.
- We estimate GARCH(1,1) models, including alternative measures of speculative activity in the variance equation.
- Speculation presents a negative sign, suggesting that it does not destabilize prices, in line with recent evidence.
- Our results are robust to more refined GARCH specifications and to the inclusion of different controls in the mean equation.

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.