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The recent run-up in oil price and other energy products between 2003 and 2008, and then their subsequent steep collapse within a few months, to many economists appears to be a huge bubble that was meant to burst (Eckaus, 2008). These developments in the price of oil and in other energy markets have been mainly attributed to the positions taken by financial investors on the futures markets, such as pension funds, hedge funds, investment banks etc. These peculiar dynamics of oil, and most of the energy commodities, have transformed them into financial assets, and as such, they are subject to speculative bubbles.
As Caballero et al. (2008) argue, the financial collapse of 2007 led investors into a search for an alternative asset class that has diversification properties able to deliver positive returns during a market downturn, and they found it in energy commodities and more specifically in oil. According to them, it is this huge inflow of capital towards energy commodities that created this huge rise in oil prices towards the end of 2008, leading to a speculative bubble that burst only a few months later. As Shleifer and Summers (1990) point out, investors' reactions to common signals or their overreaction to recent news can cause herding behaviour. However, in the case of the oil futures markets, Boyd et al. (2009) and Buyuksahin and Harris (2009) conclude that, during recent years, herding among hedge funds did not destabilise the futures markets because of its countercyclical nature. Moreover, in their study on the performance of various hedge funds and commodity fund investment styles during periods of bullish and bearish stock markets, Edwards and Caglayan (2001) find that commodity funds provide greater downside protection than hedge funds do.