Working Paper: NBER ID: w19892
Authors: James D. Hamilton; Jing Cynthia Wu
Abstract: The last decade brought substantial increased participation in commodity markets by index funds that maintain long positions in the near futures contracts. Policy makers and academic studies have reached sharply different conclusions about the effects of these funds on commodity futures prices. This paper proposes a unifying framework for examining this question, noting that according to a simple model of futures arbitrage, if index-fund buying influences prices by changing the risk premium, then the notional positions of the index investors should help predict excess returns in these contracts. We find no evidence that the positions of traders in agricultural contracts identified by the CFTC as following an index strategy can help predict returns on the near futures contracts. We review evidence that these positions might help predict changes in oil futures prices, and find that while there is some support for this in the earlier data, this appears to be driven by some of the dramatic features of the 2007-2009 recession, with the relation breaking down out of sample.
Keywords: Index Funds; Commodity Futures; Risk Premium
JEL Codes: G13; Q13; Q41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| notional positions of index fund investors (G23) | excess returns (D46) |
| index fund investing (G23) | futures prices (G13) |
| index fund positions (G23) | changes in oil futures prices (Q47) |
| extraordinary market conditions during 2007-2009 recession (E44) | correlation between index fund positions and oil futures prices (G13) |
| index fund buying (G23) | risk premium (G19) |
| risk premium (G19) | futures prices (G13) |
| index fund buying (G23) | excess returns (D46) |