Working Paper: NBER ID: w16712
Authors: Harrison Hong; Motohiro Yogo
Abstract: Economists have traditionally viewed futures prices as fully informative about future economic activity and asset prices. We argue that open interest could be more informative than futures prices in the presence of hedging demand and limited risk absorption capacity in futures markets. We find that movements in open interest are highly pro-cyclical, correlated with both macroeconomic activity and movements in asset prices. Movements in commodity market interest predict commodity returns, bond returns, and movements in the short rate even after controlling for other known predictors. To a lesser degree, movements in open interest predict returns in currency, bond, and stock markets.
Keywords: futures markets; open interest; asset prices; macroeconomic activity; hedging demand
JEL Codes: E31; E37; F31; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| open interest (F40) | future economic activity (E66) |
| open interest (F40) | asset prices (G19) |
| increase in commodity market interest (Q02) | increase in expected commodity returns (Q02) |
| increase in commodity market interest (Q02) | decrease in bond returns (G12) |
| increase in commodity market interest (Q02) | increase in short rate (E43) |
| currency market interest (E43) | appreciation of foreign currencies relative to the US dollar (F31) |