Market Sentiment in Commodity Futures Returns

56 Pages Posted: 27 Sep 2011 Last revised: 6 Jun 2016

See all articles by Lin Gao

Lin Gao

Universite du Luxembourg

Stephan Süss

Independent

Date Written: June 28, 2015

Abstract

We identify a strong presence of sentiment exposure in commodity futures returns. Sentiment is able to provide additional explanatory power for comovement among commodity futures beyond the macro- and equity-related sources. Commodity futures with low open interest growth, high volatilities, low momentum, or low futures basis are more sensitive to change in sentiment. Similar to Baker and Wurgler (2006), we construct a market sentiment index by Partial Least Squares regressions (PLS) with non-return based stock market proxies, in particular higher moments of the option implied return distribution. Moreover, our sentiment index can be built on a daily basis.

Keywords: Commodity Futures, Market Sentiment

JEL Classification: G12, G13

Suggested Citation

Gao, Lin and Süss, Stephan, Market Sentiment in Commodity Futures Returns (June 28, 2015). Journal of Empirical Finance, vol 33, pp.84-103, 2015, Available at SSRN: https://ssrn.com/abstract=1934397 or http://dx.doi.org/10.2139/ssrn.1934397

Lin Gao (Contact Author)

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Stephan Süss

Independent

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