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The Journal of Alternative Investments

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Article

The Role of Speculators During Times of Financial Distress

Naomi E. Boyd, Jeffrey H. Harris and Arkadiusz Nowak
The Journal of Alternative Investments Summer 2011, 14 (1) 10-25; DOI: https://doi.org/10.3905/jai.2011.14.1.010
Naomi E. Boyd
is an assistant professor in the Department of Finance at the West Virginia University in Morgantown, WV, and a consultant for the office of the chief economist at the Commodity Futures Trading Commission in Washington, DC.
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  • For correspondence: naomi.boyd@mail.wvu.edu
Jeffrey H. Harris
is a professor of finance in the Department of Finance at the University of Delaware in Newark, DE.
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  • For correspondence: harrisj@lerner.udel.edu
Arkadiusz Nowak
is an associate at Cornerstone Research in Washington, DC.
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  • For correspondence: anowak@cornerstone.com
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Abstract

One of the best-known and largest hedge fund failures was the 2006 failure of Amaranth Advisors, LLC. The authors use detailed, trader-level data to examine the role of speculators during times of financial distress—in this case, the failure of Amaranth. They find that speculators served as a stabilizing force during the period by maintaining or increasing long positions, even while prices fell. The authors develop two testable propositions regarding liquidation versus transfer of positions and conclude that the probability of transfer was more likely for distant contract expirations and for contracts more dominantly held by the distressed trader. The article also examines the role of speculators in providing liquidity and mitigating the effects of liquidity risk by evaluating the change in the number of traders, the size and time between trades, and a Herfindahl measure of speculative trader concentration during the crisis period.

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The Journal of Alternative Investments: 14 (1)
The Journal of Alternative Investments
Vol. 14, Issue 1
Summer 2011
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The Role of Speculators During Times of Financial Distress
Naomi E. Boyd, Jeffrey H. Harris, Arkadiusz Nowak
The Journal of Alternative Investments Jun 2011, 14 (1) 10-25; DOI: 10.3905/jai.2011.14.1.010

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The Role of Speculators During Times of Financial Distress
Naomi E. Boyd, Jeffrey H. Harris, Arkadiusz Nowak
The Journal of Alternative Investments Jun 2011, 14 (1) 10-25; DOI: 10.3905/jai.2011.14.1.010
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  • Article
    • Abstract
    • DATA DESCRIPTION
    • AMARANTH ADVISORS, LLC: THE FINANCIALLY DISTRESSED TRADER
    • THE MARKET IMPACT OF A LARGE TRADER FAILURE AND THE ROLE OF SPECULATORS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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