Sunshine vs. Predatory Trading Effects in Commodity Futures Markets: New Evidence from Index Rebalancing
50 Pages Posted: 3 Dec 2020
Date Written: June 24, 2020
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: Suggested Citation