Causality test between investor's sentiment and price movements: a case study of the NYMEX crude oil futures market

The objective of this article is to empirically investigate a causal relation between investor's sentiment and price movements for the NYMEX crude oil futures market from 1999 to 2009. With Wang's (2003) methodology, I construct an actual position-based sentiment index for two types of investors, speculators and hedgers, and then the Granger-causality is tested between investor's sentiment and price movements. Most of case studies with different sub-periods reveal that price movements cause the investor's sentiment but not vice-versa, which confirms that the investors alter their investing sentiment based on market price movements. However, from August 2007 to June 2008, when the oil prices sharply increase before the market started collapsing, it is found that investor's sentiment does cause price. Such interesting result supports that the role of investor's sentiment is more likely to be significant when the market is excessively bullish. In addition, the effect of speculator's sentiment on prices during the bullish market status is estimated to be negative, which is consistent with a classical host of speculation-based theories advocating that speculators stabilise price movements.