Too Much of a Good Thing? Speculative Effects on Commodity Futures Curves
SOAS Department of Economics Working Paper Series, No. 211
19 Pages Posted: 21 Apr 2019
Date Written: July 1, 2018
The increasing inflow of institutional investors replicating broad based indices into commodity futures markets has been linked to excessive calendar spreads and anomalies in futures curves. At the same time, these investors have been welcomed as liquidity providers. This paper hypothesises that this apparent dissent can be reconciled by considering the relative size of index positions to hedging positions, rather than the presence of index traders alone. The hypothesis is tested empirically for three soft commodity markets: cocoa, coffee, and cotton. By use of factor decomposition, the paper shows empirically that (a) index and hedging positions have inverse and offsetting effects on futures curves, and (b) index positions, net of hedging positions, are associated with upward sloping and peaked futures curves and occasionally wave-like shapes linked to roll-effects. The paper concludes that index traders are welcomed liquidity providers but can become ‘too much of a good thing’ if exceeding hedgers’ demand for counterparty.
Keywords: financialisation, futures curve, speculation, soft commodities, term structure
JEL Classification: G13, G14, Q02, Q14
Suggested Citation: Suggested Citation