Too Much of a Good Thing? Speculative Effects on Commodity Futures Curves

Sophie van Huellen

No 211, Working Papers from Department of Economics, SOAS University of London, UK

Abstract: The increasing inflow of institutional investors replicating broad based indices into commodity futures markets has been linked to excessive calendar spreads and anomalies in futures curves. At the same time, these investors have been welcomed as liquidity providers. This paper hypothesises that this apparent dissent can be reconciled by considering the relative size of index positions to hedging positions, rather than the presence of index traders alone. The hypothesis is tested empirically for three soft commodity markets: cocoa, coffee, and cotton. By use of factor decomposition, the paper shows empirically that (a) index and hedging positions have inverse and offsetting effects on futures curves, and (b) index positions, net of hedging positions, are associated with upward sloping and peaked futures curves and occasionally wave-like shapes linked to roll-effects. The paper concludes that index traders are welcomed liquidity providers but can become ëtoo much of a good thingí if exceeding hedgers' demand for counterparty.

Keywords: financialisation; futures curve; speculation; soft commodities; term structure (search for similar items in EconPapers)
JEL-codes: G13 G14 Q02 Q14 (search for similar items in EconPapers)
Pages: 17
Date: 2018-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.soas.ac.uk/sites/default/files/2022-10/economics-wp211.pdf (application/pdf)

Related works:
Journal Article: Too much of a good thing? Speculative effects on commodity futures curves (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:soa:wpaper:211

Access Statistics for this paper

More papers in Working Papers from Department of Economics, SOAS University of London, UK Contact information at EDIRC.
Bibliographic data for series maintained by Chandni Dwarkasing ().