Is the Supply Curve for Commodity Futures Contracts Upward Sloping?

Abstract

Annual rebalancing of the S&P GSCI index provides a novel and strong identification to estimate the shape of supply curves for commodity futures contracts. Using the 24 commodities included in the S&P GSCI for 2004–2017, we show that cumulative abnormal returns (CARs) reach a peak of 59 basis points in the middle of the week following the rebalancing period, but the impact is temporary as it declines to near zero within the next week. The findings provide clear evidence that the supply curve for commodity futures contracts is upward sloping in the short-run but almost flat in the longer-run.

Keywords: commodity futures, index, limits to arbitrage, order flow, rebalancing

JEL Classification: G13, G14, G23