On speculators and hedgers in currency futures markets: who leads whom?

This paper studies the lead–lag relationship between speculation and hedging activity in six currency futures markets. The relations between (i) total speculation (long plus short) and total hedging (long plus short), (ii) long speculation and short hedging, and (iii) short speculation and long hedging are investigated. The empirical results, based on vector autoregressive and vector error correction models, suggest that speculators lead hedgers in all markets examined. Moreover, speculators attract hedgers to open positions in currency futures markets.