Effects of Index-Fund Investing on Commodity Futures Prices

43 Pages Posted: 6 Sep 2013 Last revised: 22 Jul 2014

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Jing Cynthia Wu

University of Notre Dame - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 26, 2013

Abstract

The last decade brought substantial increased participation in commodity markets by index funds that maintain long positions in the near futures contracts. Policy makers and academic studies have reached sharply different conclusions about the effects of these funds on commodity futures prices. This paper proposes a unifying framework for examining this question, noting that according to a simple model of futures arbitrage, if index-fund buying influences prices by changing the risk premium, then the notional positions of the index investors should help predict excess returns in these contracts. We find no evidence that the positions of traders in agricultural contracts identified by the CFTC as following an index strategy can help predict returns on the near futures contracts. We review evidence that these positions might help predict changes in oil futures prices, and find that while there is some support for this in the earlier data, this appears to be driven by some of the dramatic features of the 2007-2009 recession, with the relation breaking down out of sample.

Suggested Citation

Hamilton, James D. and Wu, Jing Cynthia, Effects of Index-Fund Investing on Commodity Futures Prices (December 26, 2013). Chicago Booth Research Paper No. 13-73, Available at SSRN: https://ssrn.com/abstract=2321280 or http://dx.doi.org/10.2139/ssrn.2321280

James D. Hamilton

University of California at San Diego ( email )

9500 Gilman Drive
Mail code: 0508
La Jolla, CA 92093-0508
United States
619-534-5986 (Phone)
619-534-7040 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jing Cynthia Wu (Contact Author)

University of Notre Dame - Department of Economics ( email )

Notre Dame, IN 46556
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
223
Abstract Views
1,816
Rank
206,007
PlumX Metrics