Investor Sentiment and Forecasting Ability: Evidence from COT Reports in Precious Metal Futures Markets

41 Pages Posted: 22 Jan 2014 Last revised: 7 Apr 2017

See all articles by Yang Zhang

Yang Zhang

Northwestern University; Durham Business School

Jason Laws

University of Liverpool - Accounting and Finance Division

Date Written: September 16, 2013

Abstract

Exploring the information contained in Commodity Futures Trading Commission’s (CFTC) Commitments of Traders (COT) reports, this analysis investigates the forecasting ability of investor sentiment index in three major precious metal futures markets, namely, Gold, Silver, and Platinum. A strong contemporaneous relationship between investor sentiment and market returns has been found. In specific, commercial traders’ sentiment acts oppositely to the price changes while that of non-commercial and non-reporting traders positively correlated with the market returns. However, the bivariate Granger causality test shows little evidence that investor sentiment index could lead market returns. On the other hand, market returns generally lead investor sentiment. Particularly, commercial traders are trend counters while non-commercial and non-reporting traders are trend followers. Extreme traders’ position also fails to display significant forecasting ability of subsequent price movements. In general, the results do not support the use of investor sentiment as an indicator to predict price movements in precious metal futures markets. Nevertheless, we find that investor sentiment could play as a signal of buying or selling and the trading system is highly profitable compared to naïve long position in all of three markets.

Keywords: Investor Sentiment, Forecasting Ability, COT Reports

JEL Classification: F17, E47

Suggested Citation

Zhang, Yang and Laws, Jason, Investor Sentiment and Forecasting Ability: Evidence from COT Reports in Precious Metal Futures Markets (September 16, 2013). Available at SSRN: https://ssrn.com/abstract=2382299 or http://dx.doi.org/10.2139/ssrn.2382299

Yang Zhang (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Durham Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

Jason Laws

University of Liverpool - Accounting and Finance Division ( email )

United Kingdom

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