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Measuring Index Investment in Commodity Futures Markets

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  • Dwight R. Sanders
  • Scott H. Irwin

Abstract

The “Masters Hypothesis†is the claim that unprecedented buyingpres-sure in recent years from new index investment created a massive bubble in commodity futures prices. Due to data limitations, some recent studies of the market impact of index investment in the WTI crude oil futures market impute index positions. We investigate the accuracy of the algorithm popularized by Masters (2008) to estimate index positions. The estimates generated by the Masters algorithm deviate substantially from the positions reported in the U.S. Commodity Futures Trading Commission’s (CFTC) Index Investment Data (IID) report—the agency’s best data on index positions. The Masters algorithm over-estimates the gross WTI crude oil position by an average of 142,000 contracts. Importantly, the deviation in the first half of 2008, the period of greatest concern about the market impact of index investment, is directionally wrong. These results suggest empirical tests of market impact based on mapping algorithms in WTI crude oil futures should be viewed with considerable caution.

Suggested Citation

  • Dwight R. Sanders & Scott H. Irwin, 2013. "Measuring Index Investment in Commodity Futures Markets," The Energy Journal, , vol. 34(3), pages 105-127, July.
    • Handle: RePEc:sae:enejou:v:34:y:2013:i:3:p:105-127
    DOI: 10.5547/01956574.34.3.6
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    References listed on IDEAS

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    1. Bassam Fattouh & Lutz Kilian & Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, , vol. 34(3), pages 7-33, July.
    2. Louis Ederington & Jae Ha Lee, 2002. "Who Trades Futures and How: Evidence from the Heating Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 75(2), pages 353-374, April.
    3. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
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    1. Mixon, Scott & Onur, Esen, 2016. "Exploring Commodity Trading Activity: An Integrated Analysis of Swaps and Futures," 2016 Conference, April 18-19, 2016, St. Louis, Missouri 285857, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    2. Sanders, Dwight R. & Irwin, Scott H., 2015. "Bubbles, Froth, and Facts: What Evidence is there to Support the Masters Hypothesis?," 2015 Conference, April 20-21, 2015, St. Louis, Missouri 285837, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    3. Bierbaumer, Daniel & Rieth, Malte & Velinov, Anton, 2021. "The state-dependent trading behavior of banks in the oil futures market," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 191, pages 1011-1024.
    4. Sanders, Dwight R. & Irwin, Scott H., 2014. "The ‘Necessity’ of New Position Limits in Agricultural Futures Markets:," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285813, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.

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