Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay

79 Pages Posted: 30 Nov 2017 Last revised: 4 Jan 2021

See all articles by Steven Wei Ho

Steven Wei Ho

Columbia University, Graduate School of Arts and Sciences, Department of Economics

Alexandre R. Lauwers

University of Geneva - Graduate Institute, Geneva (IHEID)

Date Written: January 1, 2021

Abstract

We document a new empirical phenomenon in which the positions of money managers (MM), who are sophisticated speculators in the commodity futures market, as disclosed by the CFTC Disaggregated Commitments of Traders (DCOT) reports, can predict the cross-section of commodity producers' stock returns in the subsequent week. We employ cross-sectional methodologies including single-sort, Jensen's alpha analysis, double-sort, and Fama-Macbeth regressions to confirm the predictability results. The results are more pronounced in firms with higher information asymmetry, proxied by analyst dispersion and historical volatility. We thus provide more empirical evidence to the literature on costly information processing which leads to market segmentation and gradual information diffusion across asset markets, as demonstrated in the lead-lag relationship.

Keywords: Costly Information Processing, Commodity, Equity Return Predictability, Market Segmentation, Gradual Information Diffusion

JEL Classification: G11, G14

Suggested Citation

Ho, Steven Wei and Lauwers, Alexandre, Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay (January 1, 2021). AFA 2019 Atlanta Meetings Paper, Paris December 2018 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=3077802 or http://dx.doi.org/10.2139/ssrn.3077802

Steven Wei Ho (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

HOME PAGE: http://econ.columbia.edu/steven-ho

Alexandre Lauwers

University of Geneva - Graduate Institute, Geneva (IHEID) ( email )

Case postale 1672
Geneva, 1211
Switzerland

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