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

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Lei Yan

University of Illinois at Urbana-Champaign

Scott H. Irwin

University of Illinois at Urbana-Champaign

Dwight R. Sanders

Southern Illinois University at Carbondale - Agribusiness Economics

Date Written: October 20, 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 (October 20, 2020). Available at SSRN: https://ssrn.com/abstract=

Lei Yan

University of Illinois at Urbana-Champaign

601 E John St
Champaign, IL 61820
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 at Carbondale - Agribusiness Economics ( email )

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

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