Identifying Speculative Demand Shocks in Commodity Futures Markets Through Changes in Volatility

33 Pages Posted: 10 Mar 2017

See all articles by Michael Hachula

Michael Hachula

Free University of Berlin (FUB); German Institute for Economic Research (DIW Berlin)

Malte Rieth

German Institute for Economic Research (DIW Berlin)

Date Written: March 2017

Abstract

This paper studies the effects of financial speculation on commodity futures returns, using publicly available data from the US Commodity Futures Trading Commission, aggregated by trader groups. We exploit the heteroskedasticity in the weekly data to identify exogenous variation in speculators’ positions. The results suggest that idiosyncratic net long demand shocks of both index investors and hedge funds increase futures returns. They further indicate that these shocks are a relevant driver of returns, especially during periods of high speculative demand volatility. These findings confirm significant price effects of financial investments, complementing existing evidence based on disaggregated and proprietary daily data.

Keywords: Financialization, hedge funds, index investors, market structure, liquidity, limits to arbitrage, heteroskedasticity

JEL Classification: Q02; G13; E39

Suggested Citation

Hachula, Michael and Rieth, Malte, Identifying Speculative Demand Shocks in Commodity Futures Markets Through Changes in Volatility (March 2017). DIW Berlin Discussion Paper No. 1646. Available at SSRN: https://ssrn.com/abstract=2930880

Michael Hachula (Contact Author)

Free University of Berlin (FUB) ( email )

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Malte Rieth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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