Order Flows and Financial Investor Impacts in Commodity Futures Markets

Abstract

Using intraday data, we document a statistically strong, but temporary, association between commodity-index trader flows and commodity futures prices. Reexamining the positive returns associated with the issuance of commodity-linked notes documented by Henderson, Pearson, and Wang (2015), we find that these returns are too large to be explained by the small trades necessary to hedge these notes, and provide new evidence that they are instead the result of endogenous issuance. Our results provide novel support for commodity financialization, but highlight the importance of measuring the magnitude of financial investment, since even large financial flows have economically modest impacts on prices.

Keywords: Commodity Markets, Futures, Order Flow, Financialization

JEL Classification: G12, G13, G14