Determinants of Trader Profits in Commodity Futures Markets

Review of Financial Studies, Forthcoming

56 Pages Posted: 20 Jun 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: 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

Dewally, Michaël and Ederington, Louis H. and Fernando, Chitru S., Determinants of Trader Profits in Commodity Futures Markets (June 19, 2013). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2281971

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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