Determinants of Trader Profits in Commodity Futures Markets
Review of Financial Studies, Forthcoming
56 Pages Posted: 20 Jun 2013
Date Written: June 19, 2013
Abstract
Using proprietary energy futures position data, we provide evidence that mean hedger profits are negative while speculator (especially hedge fund) profits are positive; that speculators and hedgers who hold long (short) positions when likely hedgers in aggregate are net short (long) have higher profits than traders whose net positions align with likely hedgers; and that profits on long positions vary inversely with inventories and directly with price volatility. These findings are consistent with the risk premium, hedging pressure, and modern theory of storage hypotheses, respectively. Further, our findings suggest that commodity futures momentum may be due largely to hedging pressure.
Keywords: commodity futures, risk premium, hedging pressure, theory of storage, momentum, trader profits, speculators, hedgers, hedge funds, market makers
JEL Classification: G12, G13, G18, Q40
Suggested Citation: Suggested Citation
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