Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay
AFA 2019 Atlanta Meetings Paper
79 Pages Posted: 30 Nov 2017 Last revised: 4 Jan 2021
Date Written: January 1, 2021
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: Suggested Citation