Derivatives Markets and Managed Money: Implications for Price Discovery

The International Journal of Business and Finance Research, v. 13 (1) p. 53-61, 2019

9 Pages Posted: 8 Apr 2019

See all articles by Gregory W. Arburn

Gregory W. Arburn

University of Findlay

Laura Harper

University of Findlay, Students

Date Written: 2019

Abstract

Derivatives markets determination of commodities prices should largely be based on production and utilization of the underlying commodity. Certainly, government programs designed to impact production or utilization including expectations associated with those programs, as well as, weather, geopolitical issues, related commodity dynamics, terrorism, etc. could potentially impact prices. Derivatives markets participants such as producers, merchants, warehousers, processors and end users play a fundamental role of providing liquidity through their management of risk. Of increasing significance is managed money. Hedge funds, commodities index contracts, and commodity Exchange Traded Funds (ETFs) are types of managed money that look to commodity derivatives markets to speculate. This research project utilizes panel data, commodities prices and Commodities Futures Trading Commission (CFTC) data on Commitment of Traders (COT) to isolate the impact that managed money has on commodities prices. To this end we employ regression analysis to analyze various periods of time to test our hypothesis that the flow of managed money into and out of commodities derivatives markets creates price changes not consistent with production and utilization.

Keywords: Price Discovery, Managed Futures, Commitment of Traders, Regression, Hedge Funds, Managed Money, Speculation, Derivatives, Futures, Options, Swaps, CFTC

JEL Classification: G10

Suggested Citation

Arburn, Gregory W. and Harper, Laura, Derivatives Markets and Managed Money: Implications for Price Discovery (2019). The International Journal of Business and Finance Research, v. 13 (1) p. 53-61, 2019. Available at SSRN: https://ssrn.com/abstract=3340162

Gregory W. Arburn (Contact Author)

University of Findlay ( email )

Hancock County, OH
United States

Laura Harper

University of Findlay, Students

OH
United States

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