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The Relationship between Commodity Investment Flows and Crude Oil Futures Prices: Real or Spurious?

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  • Yan, Lei
  • Irwin, Scott H.
  • Sanders, Dwight R.

Abstract

Commodity index investment has increased dramatically since 2004 and aroused an intense debate about the market impact of these investment flows on futures prices. Due to data scarcity some studies rely on mapping algorithms to infer index positions in WTI crude oil futures from agricultural commodities and find an economically large and statistically significant impact of index positions on crude oil futures prices. This paper provides direct evidence that the identified impact of index investment from mapping algorithms is spurious, with the entire forecasting power coming from 2008. Mapping algorithms implicitly assume annually fixed ratios in index positions between WTI crude oil and agricultural commodities, which generally does not hold. An idiosyncratic spike in agricultural index positions during 2008, coupled with the spike in oil prices, causes the spurious impact of index investment on crude oil futures prices found in earlier studies.

Suggested Citation

  • Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., "undated". "The Relationship between Commodity Investment Flows and Crude Oil Futures Prices: Real or Spurious?," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235933, Agricultural and Applied Economics Association.
    • Handle: RePEc:ags:aaea16:235933
    DOI: 10.22004/ag.econ.235933
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    References listed on IDEAS

    as
    1. Ing-Haw Cheng & Andrei Kirilenko & Wei Xiong, 2015. "Convective Risk Flows in Commodity Futures Markets," Review of Finance, European Finance Association, vol. 19(5), pages 1733-1781.
    2. Christopher L. Gilbert, 2010. "Speculative Influences On Commodity Futures Prices 2006-2008," UNCTAD Discussion Papers 197, United Nations Conference on Trade and Development.
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    Cited by:

    1. Figuerola-Ferretti, Isabel & McCrorie, J. Roderick & Paraskevopoulos, Ioannis, 2020. "Mild explosivity in recent crude oil prices," Energy Economics, Elsevier, vol. 87(C).
    2. He, Huizi & Sun, Mei & Gao, Cuixia & Li, Xiuming, 2021. "Detecting lag linkage effect between economic policy uncertainty and crude oil price: A multi-scale perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 580(C).
    3. Dai, Peng-Fei & Xiong, Xiong & Zhang, Jin & Zhou, Wei-Xing, 2022. "The role of global economic policy uncertainty in predicting crude oil futures volatility: Evidence from a two-factor GARCH-MIDAS model," Resources Policy, Elsevier, vol. 78(C).
    4. Christopher L. Gilbert, 2018. "Investor sentiment and market fundamentals: the impact of index investment on energy and metals markets," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 31(1), pages 87-102, May.
    5. Zhang, Yue-Jun & Lin, Jia-Juan, 2019. "Can the VAR model outperform MRS model for asset allocation in commodity market under different risk preferences of investors?," International Review of Financial Analysis, Elsevier, vol. 66(C).
    6. Moses M. Kupabado & Juergen Kaehler, 2021. "Financialization, common stochastic trends, and commodity prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(12), pages 1988-2008, December.

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    Financial Economics; Research Methods/ Statistical Methods;

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