Determinants of Trader Profits in Futures Markets

60 Pages Posted: 10 Mar 2011 Last revised: 28 Jan 2013

See all articles by Michaël Dewally

Michaël Dewally

Towson University - Department of Finance

Louis H. Ederington

University of Oklahoma - Division of Finance

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business

Date Written: January 24, 2013

Abstract

Using a unique proprietary data set of positions held by all large traders in the crude oil, gasoline, and heating oil futures markets, we use actual trader profits to test the predictions of various commodity futures pricing models. We find statistically and economically significant evidence that: (a) mean hedger profits are negative while speculator profits are positive, which is consistent with the risk premium hypothesis, (b) traders (whether speculators or hedgers) who hold long (short) positions when likely hedgers in aggregate are net short (long) have higher profits than traders whose net positions are aligned with likely hedgers, which is consistent with the hedging pressure hypothesis, and (c) profits on long positions vary inversely with inventories and directly with price volatility, which is consistent with the modern theory of storage. We establish these associations while controlling for macroeconomic risk factors that potentially affect futures returns and for trader characteristics. Our results indicate also that the momentum in commodity futures markets may be due largely to hedging pressure.

Suggested Citation

Dewally, Michaël and Ederington, Louis H. and Fernando, Chitru S., Determinants of Trader Profits in Futures Markets (January 24, 2013). Available at SSRN: https://ssrn.com/abstract=1781975 or http://dx.doi.org/10.2139/ssrn.1781975

Michaël Dewally

Towson University - Department of Finance ( email )

8000 York Road
Suite 316 L
Baltimore, MD 21252-0001
United States
410-704-4902 (Phone)

Louis H. Ederington (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Chitru S. Fernando

University of Oklahoma - Michael F. Price College of Business ( email )

Adams Hall
307 West Brooks Street
Norman, OK 73019-4004
United States
405-325-2906 (Phone)
405-325-7688 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/F/Chitru.Fernando-1/

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