Market Sentiment in Commodity Futures Returns
56 Pages Posted: 27 Sep 2011 Last revised: 6 Jun 2016
Date Written: June 28, 2015
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: Suggested Citation