IDEAS home Printed from https://ideas.repec.org/a/eee/riibaf/v59y2022ics0275531921001501.html
   My bibliography  Save this article

Traders’ motivation and hedging pressure in commodity futures markets

Author

Listed:
  • Bosch, David
  • Smimou, K.

Abstract

This study seeks to explain the major drivers of trading activity in commodity futures markets and gage the effect of trading activity on commodity prices. Rather than concentrating on a specific commodity subgroup or a particular type of commodity traders, we provide an extensive overview of the behavior across all market participants and their influence on commodity prices by using a broad set of commodity futures contracts. Although commodity futures returns show co-movement with financial fundamentals (U.S. dollar index, equity, and bond markets), based on the Disaggregated Commitment of Traders Report (DCOT), this relationship cannot be attributed to trading activity. Pricing in commodity markets can be predominantly attributed to hedgers and influential speculators (money managers), whereas small speculators (nonreportable traders) are crucial to some soft commodity futures similar to dealers in metals commodity futures. Furthermore, we find limited cases where inventory changes exert a sizable influence on position changes of DCOT traders.

Suggested Citation

  • Bosch, David & Smimou, K., 2022. "Traders’ motivation and hedging pressure in commodity futures markets," Research in International Business and Finance, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:riibaf:v:59:y:2022:i:c:s0275531921001501
    DOI: 10.1016/j.ribaf.2021.101529
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0275531921001501
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ribaf.2021.101529?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Conghui Hu & Wei Xiong, 2013. "Are Commodity Futures Prices Barometers of the Global Economy?," NBER Working Papers 19706, National Bureau of Economic Research, Inc.
    2. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    3. Delatte, Anne-Laure & Lopez, Claude, 2013. "Commodity and equity markets: Some stylized facts from a copula approach," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5346-5356.
    4. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    5. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    6. Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
    7. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
    8. Suleyman Basak & Anna Pavlova, 2016. "A Model of Financialization of Commodities," Journal of Finance, American Finance Association, vol. 71(4), pages 1511-1556, August.
    9. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    10. Batten, Jonathan A. & Ciner, Cetin & Lucey, Brian M., 2010. "The macroeconomic determinants of volatility in precious metals markets," Resources Policy, Elsevier, vol. 35(2), pages 65-71, June.
    11. Bosch, David & Pradkhan, Elina, 2015. "The impact of speculation on precious metals futures markets," Resources Policy, Elsevier, vol. 44(C), pages 118-134.
    12. Ji, Qiang & Bahloul, Walid & Geng, Jiang-Bo & Gupta, Rangan, 2020. "Trading behaviour connectedness across commodity markets: Evidence from the hedgers’ sentiment perspective," Research in International Business and Finance, Elsevier, vol. 52(C).
    13. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 42-65.
    14. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    15. Ing-Haw Cheng & Wei Xiong, 2014. "Why Do Hedgers Trade So Much?," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 183-207.
    16. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    17. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    18. Moskowitz, Tobias J. & Ooi, Yao Hua & Pedersen, Lasse Heje, 2012. "Time series momentum," Journal of Financial Economics, Elsevier, vol. 104(2), pages 228-250.
    19. Frans A. De Roon & Theo E. Nijman & Chris Veld, 2000. "Hedging Pressure Effects in Futures Markets," Journal of Finance, American Finance Association, vol. 55(3), pages 1437-1456, June.
    20. Alessandro Borin & Virginia Di Nino, 2012. "The role of financial investments in agricultural commodity derivatives markets," Temi di discussione (Economic working papers) 849, Bank of Italy, Economic Research and International Relations Area.
    21. Sanders, Dwight R. & Boris, Keith & Manfredo, Mark, 2004. "Hedgers, funds, and small speculators in the energy futures markets: an analysis of the CFTC's Commitments of Traders reports," Energy Economics, Elsevier, vol. 26(3), pages 425-445, May.
    22. Tokic, Damir, 2012. "Speculation and the 2008 oil bubble: The DCOT Report analysis," Energy Policy, Elsevier, vol. 45(C), pages 541-550.
    23. Dwight R. Sanders & Scott H. Irwin, 2010. "A speculative bubble in commodity futures prices? Cross‐sectional evidence," Agricultural Economics, International Association of Agricultural Economists, vol. 41(1), pages 25-32, January.
    24. Dwight R. Sanders & Scott H. Irwin, 2011. "New Evidence on the Impact of Index Funds in U.S. Grain Futures Markets," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 59(4), pages 519-532, December.
    25. Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    26. Olson, Eric & J. Vivian, Andrew & Wohar, Mark E., 2014. "The relationship between energy and equity markets: Evidence from volatility impulse response functions," Energy Economics, Elsevier, vol. 43(C), pages 297-305.
    27. Akram, Q. Farooq, 2009. "Commodity prices, interest rates and the dollar," Energy Economics, Elsevier, vol. 31(6), pages 838-851, November.
    28. Bekiros, Stelios & Nguyen, Duc Khuong & Uddin, Gazi Salah & Sjö, Bo, 2016. "On the time scale behavior of equity-commodity links: Implications for portfolio management," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 41(C), pages 30-46.
    29. Basu, Devraj & Miffre, Joëlle, 2013. "Capturing the risk premium of commodity futures: The role of hedging pressure," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2652-2664.
    30. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    31. G. David Haushalter, 2000. "Financing Policy, Basis Risk, and Corporate Hedging: Evidence from Oil and Gas Producers," Journal of Finance, American Finance Association, vol. 55(1), pages 107-152, February.
    32. Óscar Carchano & Ángel Pardo, 2009. "Rolling over stock index futures contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 29(7), pages 684-694, July.
    33. Kenneth J. Singleton, 2014. "Investor Flows and the 2008 Boom/Bust in Oil Prices," Management Science, INFORMS, vol. 60(2), pages 300-318, February.
    34. Klomp, Jeroen, 2020. "The impact of Russian sanctions on the return of agricultural commodity futures in the EU," Research in International Business and Finance, Elsevier, vol. 51(C).
    35. K. Geert Rouwenhorst & Ke Tang, 2012. "Commodity Investing," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 447-467, October.
    36. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    37. Jörg Mayer, 2009. "The Growing Interdependence Between Financial And Commodity Markets," UNCTAD Discussion Papers 195, United Nations Conference on Trade and Development.
    38. Mark, Joy, 2011. "Gold and the US dollar: Hedge or haven?," Finance Research Letters, Elsevier, vol. 8(3), pages 120-131, September.
    39. Ana‐Maria Fuertes & Joëlle Miffre & Adrian Fernandez‐Perez, 2015. "Commodity Strategies Based on Momentum, Term Structure, and Idiosyncratic Volatility," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 35(3), pages 274-297, March.
    40. Gozgor, Giray & Lau, Chi Keung Marco & Bilgin, Mehmet Huseyin, 2016. "Commodity markets volatility transmission: Roles of risk perceptions and uncertainty in financial markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 35-45.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Long, Shaobo & Guo, Jiaqi, 2022. "Infectious disease equity market volatility, geopolitical risk, speculation, and commodity returns: Comparative analysis of five epidemic outbreaks," Research in International Business and Finance, Elsevier, vol. 62(C).
    2. Boos, Dominik & Grob, Linus, 2023. "Tracking speculative trading," Journal of Financial Markets, Elsevier, vol. 64(C).
    3. Xu, Wei & Šević, Aleksandar & Šević, Željko, 2022. "Implied volatility surface construction for commodity futures options traded in China," Research in International Business and Finance, Elsevier, vol. 61(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    2. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    3. Xiao, Qin & Yan, Meilan & Zhang, Dalu, 2023. "Commodity market financialization, herding and signals: An asymmetric GARCH R-vine copula approach," International Review of Financial Analysis, Elsevier, vol. 89(C).
    4. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    5. Hu, Min & Zhang, Dayong & Ji, Qiang & Wei, Lijian, 2020. "Macro factors and the realized volatility of commodities: A dynamic network analysis," Resources Policy, Elsevier, vol. 68(C).
    6. Koch, Nicolas, 2014. "Tail events: A new approach to understanding extreme energy commodity prices," Energy Economics, Elsevier, vol. 43(C), pages 195-205.
    7. Duc Huynh, Toan Luu & Burggraf, Tobias & Nasir, Muhammad Ali, 2020. "Financialisation of natural resources & instability caused by risk transfer in commodity markets," Resources Policy, Elsevier, vol. 66(C).
    8. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    9. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    10. Chatziantoniou, Ioannis & Filippidis, Michail & Filis, George & Gabauer, David, 2021. "A closer look into the global determinants of oil price volatility," Energy Economics, Elsevier, vol. 95(C).
    11. Michael Hachula & Malte Rieth, 2020. "Estimating the Impact of Financial Investments on Agricultural Futures Prices using Changes in Volatility," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 759-785, May.
    12. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2018. "Mapping algorithms, agricultural futures, and the relationship between commodity investment flows and crude oil futures prices," Energy Economics, Elsevier, vol. 72(C), pages 486-504.
    13. Wu, Nan & Wen, Fenghua & Gong, Xu, 2022. "Marionettes behind co-movement of commodity prices: Roles of speculative and hedging activities," Energy Economics, Elsevier, vol. 115(C).
    14. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.
    15. Steven D. Baker, 2021. "The Financialization of Storable Commodities," Management Science, INFORMS, vol. 67(1), pages 471-499, January.
    16. Mayer, Herbert & Rathgeber, Andreas & Wanner, Markus, 2017. "Financialization of metal markets: Does futures trading influence spot prices and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 300-316.
    17. Mohammad Isleimeyyeh, 2020. "The role of financial investors in determining the commodity futures risk premium," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(9), pages 1375-1397, September.
    18. Caporin, Massimiliano & Naeem, Muhammad Abubakr & Arif, Muhammad & Hasan, Mudassar & Vo, Xuan Vinh & Hussain Shahzad, Syed Jawad, 2021. "Asymmetric and time-frequency spillovers among commodities using high-frequency data," Resources Policy, Elsevier, vol. 70(C).
    19. Bonnier, Jean-Baptiste, 2021. "Speculation and informational efficiency in commodity futures markets," Journal of International Money and Finance, Elsevier, vol. 117(C).
    20. Filippo Natoli, 2018. "Analyzing the structural transformation of commodity markets: financialization revisited," Questioni di Economia e Finanza (Occasional Papers) 419, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Hedgers; Speculators; Motivation; Interaction; Futures prices; Commodity markets;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:riibaf:v:59:y:2022:i:c:s0275531921001501. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ribaf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.