Do Speculators Wag the Dog? Maybe Not

Recent spikes in volatility for both and equities have left many market watchers complaining about the inordinate influence of speculators, whose bets on these prices often are said to drive markets without reflecting underlying fundamentals.

But a recent study by Wharton School of Business finance professor Krista Schwarz finds fault with this "tail wags the dog" view, determining instead that the broader range of investors could learn much from the net positions of non-commercial hedgers.

Schwarz, whose paper "?" is being published in an upcoming issue of the , studied the relationship between hedgers and speculators, and returns in equity futures markets. She found that the "revelation of speculators' positions is informative to investors more broadly," supporting the view that these speculators possess "private information" that lead them to take their positions.

The Commodity Futures Trading Commission requires large participants in futures markets to report their positions weekly -- along with whether they are commercial hedgers using their futures positions to offset underlying business activities, or non-commercial speculators placing bets.

Schwarz looked at data about eight different types of equity futures contracts reported between October 1992 and June 2010 and found a "significant positive contemporaneous [italics in original] relationship between net non-commercial positioning changes and returns," a relationship which "sticks" in that "the subsequent periods' returns are not negatively correlated with positions in the current period."

Writes Schwarz, "A potential explanation for this is that non-commercial participants have private information. I find a significant market reaction to the public release of information about position that supports the hypothesis of asymmetric information among trader types."