Effect of Speculators’ Position Changes on the LME Futures Market

Jaehwan Park

doi:10.3390/ijfs7020032

Abstract

This paper employs Granger causality tests to analyze the role of speculators using weekly COTR (commitment of traders reports) data covering the period of August 2014 to July 2017. The paper presents statistically significant evidence that the position changes of speculators, such as hedge funds and CTAs (commodity trading advisors), unidirectionally Granger-cause the prices of base metals, such as aluminum, copper, and zinc. This finding is a result of causality going from the levels of net futures positions of money managers to futures price changes on the London Metal Exchange (LME). However, producers’ and swap dealers’ speculative roles in price-formation are rejected in Granger causality tests. This paper presents clear results with important market implications.

Highlights

Traditional discussion of commodity futures markets is in terms of hedgers and speculators (Gilbert 2010)
The purpose of this paper is to examine data from the COTR to test the relationship between London Metal Exchange (LME) (London metal exchange)3 futures prices and the trading positions of various types of investors
Money managers are engaged in managing LME contracts on behalf of clients, while broker–dealer/index traders are engaged in transactions and use the LME to manage or hedge the risk associated with those transactions

Summary

Introduction

Traditional discussion of commodity futures markets is in terms of hedgers and speculators (Gilbert 2010). The commodity futures markets have become important as investors regard commodity futures as an alternative asset class, comparable with equity and bonds (Tang and Xiong 2012). The coincidental and rapid rise in the prices of commodities and the increased number of financial investors in commodities futures markets between 2000 and 2008 have led certain observers to question whether speculators have distorted commodity prices. The key argument is whether the financialization (Cheng and Xiong 2014) of commodities markets distorts commodities prices. Gilbert (2010) observed a statistically significant relationship between index fund trading and food prices in agriculture Substantial attention from legislators (US Senate Permanent Subcommittee on Investigations USPSI2), academia, and news media have intensified the debate. Buyuksahin et al (2009) reported that the rise in investments by non-commercial traders contributed to concurrent oil price increases in energy. Gilbert (2010) observed a statistically significant relationship between index fund trading and food prices in agriculture

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