What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
Princeton University - Department of Economics; National Bureau of Economic Research
April 24, 2012
Journal of Financial Economics (JFE), Vol. 105, No. 3, 2012
AFA 2010 Atlanta Meetings Paper
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.
Number of Pages in PDF File: 46
Keywords: Bonds, Business cycle, Commodities, Currencies, Futures market, Inflation
JEL Classification: E31, E37, F31, G12, G13
Date posted: March 22, 2009 ; Last revised: June 24, 2012