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What do movements in financial traders’ net long positions reveal about aggregate stock returns?

Kwamie Dunbar and Jing Jiang

The North American Journal of Economics and Finance, 2020, vol. 51, issue C

Abstract: Previous financial economics studies have successfully identified the existence of informed trading in futures markets; however, there is no study on the specific type of strategy chosen by informed agents to maximize profits. To fill this gap in the literature, we investigate the importance of movements in futures traders’ net long positions in predicting aggregate equity market returns. This study finds that movements in the net long positions of bond, commodity, and stock futures traders are strong predictors of aggregate stock returns as they outperform a large number of popular return predictors both in and out of sample. In addition, a one-standard-deviation change in futures traders’ net long positions can lead to an increase (decrease) of up to 3.4% (4.12%) in annualized market excess equity returns. The study’s first-order autocorrelation results reveal an absence of persistence in the net long predictors. A vector autoregression decomposition shows that the economic source of financial traders’ net long position predictive power stems predominantly from the discount rate and cash flow channels. Overall, the study finds that financial traders are informed traders who are able to anticipate future aggregate cash flows and associated discount rate news.

Keywords: Commodities; Net-long position; Futures markets; Financial traders; Hedging-pressure (search for similar items in EconPapers)
JEL-codes: E31 E37 F31 G12 G13 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:51:y:2020:i:c:s1062940818303474

DOI: 10.1016/j.najef.2019.01.005

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