Too much of a good thing? Speculative effects on commodity futures curves

Abstract

The increasing inflow of index traders into commodity futures markets has been linked to anomalies in futures curves. At the same time, these investors have been welcomed as liquidity providers. In this paper, I reconcile the apparent dissent. Using factor decomposition, I show (a) that index and hedging positions have offsetting effects on futures curves, and (b) index positions are associated with upward sloping, peaked futures curves, and occasionally wave-like shapes linked to roll effects. These findings suggest that index traders are liquidity providers but can become too much of a good thing if exceeding hedgers' demand for a counterparty.