New indices of adequate and excess speculation and their relationship with volatility in the crude oil futures market

I develop new indices of adequate and excess speculation in futures markets, defining adequate speculation as speculation which equals unbalanced hedging, while excess speculation is speculation in excess of this amount. The indices explicitly account for balancing hedging and balancing speculative contracts. I demonstrate that these indices accurately estimate Working's (1960) conceptual definition for his speculative index as the ratio of speculation to unbalanced hedging in all situations, while Working's formula for his speculative index T does not. I compare these indices to Working's formula for 21 futures contracts, including commodity, financial, cash-settled and physical delivery contracts. I apply these indices to investigate the relationship between speculation and volatility of the NYMEX's West Texas Intermediate (WTI) crude oil futures contract, over 1986 through 2015, while controlling for market fundamental risk. The results suggest that volatility in the crude oil futures market decreases with adequate speculation and increases with excess speculation.