Sunshine vs. Predatory Trading Effects in Commodity Futures Markets: New Evidence from Index Rebalancing

50 Pages Posted: 3 Dec 2020

See all articles by Lei Yan

Lei Yan

Yale University

Scott H. Irwin

University of Illinois at Urbana-Champaign

Dwight R. Sanders

Southern Illinois University - Agribusiness Economics

Date Written: June 24, 2020

Abstract

Annual rebalancing of the S&P GSCI provides a novel identification of the impact of predictable order flows from index investors in commodity futures markets. Using the 24 commodities included in the S&P GSCI for 2004–2019, we show that cumulative abnormal returns to a long-short strategy peaked at 72 basis points in the middle of the week following the rebalancing period, but the impact declines to near zero within the next week. The findings show that the impact of order flows from financial investors on commodity futures prices is modest and temporary, consistent with the prediction of sunshine trading theory.

Keywords: commodity futures, financialization, index, order flow, rebalancing

JEL Classification: G13, G14, G23

Suggested Citation

Yan, Lei and Irwin, Scott and Sanders, Dwight R., Sunshine vs. Predatory Trading Effects in Commodity Futures Markets: New Evidence from Index Rebalancing (June 24, 2020). Available at SSRN: https://ssrn.com/abstract=3715726 or http://dx.doi.org/10.2139/ssrn.3715726

Lei Yan

Yale University

New Haven, CT 06511
United States

Scott Irwin (Contact Author)

University of Illinois at Urbana-Champaign ( email )

344 Mumford Hall
1301 W. Gregory Dr.
Urbana, IL 61801
United States
217-333-6087 (Phone)

HOME PAGE: http://https://scotthirwin.com/

Dwight R. Sanders

Southern Illinois University - Agribusiness Economics ( email )

Carbondale, IL 62901-4515
United States
618-453-1711 (Phone)

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