Hedging and Speculative Pressures: An Investigation of the Relationships among Trading Positions and Prices in Commodity Futures Markets

This study provides a systematic empirical investigation of lead-lag relationships among trading positions and prices in commodity futures markets. It employs Toda-Yamamoto Granger-causality tests applied on a variety of measurements of hedging, speculative, and index trader position activities and futures prices. Weekly futures market positions from the Commodity Futures Trading Commission (CFTC) and prices are examined for 24 commodities (1995 to 2011) based on Commitments of Traders (COT) reports and twelve commodities (2006 to 2011) based on Commodity Index Trader Supplement (CIT) reports. In particular, this study empirically examines whether pressures on prices due to hedging and speculative activities can be identified, and whether they have changed due to structural changes in commodity futures markets. Results suggest little systematic lead-lag relationship from hedging and speculative activities to prices. In contrast, there is strong evidence that prices tend to lead traders’ hedging and speculative activity. These results appear to be generally persistent over commodities, measurements of hedging and speculation, and periods. In summary, hedging and speculative pressures may not be helpful in explaining prices in commodity futures markets; to the contrary, prices may cause traders to change their positions.