EURO 2024 Copenhagen
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2688. The Role of Investor Sentiment in Commodity Price Behavior: Clarifying Evidence Based On Time-Varying Causality Tests

Invited abstract in session MC-63: Natural Resource Management and Commodity Markets, stream OR in Banking, Finance and Insurance: New Tools for Risk Management.

Monday, 12:30-14:00
Room: S14 (building: 101)

Authors (first author is the speaker)

1. Roderick McCrorie
Department of Economics, University of St Andrews Business School
2. Mario Lupoli
BNP Paribas

Abstract

Time-varying causality tests robust to mild explosivity, bubbles and crashes are used to provide a new, evidence-based perspective on commodity financialization, where money flows associated with index investors are conjectured to predict changes in commodity futures prices. We show that Singleton’s (2014, Management Science) finding that money flows helped predict changes in crude oil futures prices is almost entirely attributable to the atypical behaviour of oil prices around the Global Financial Crisis, an aspect we show a standard Granger causality test applied over the whole sample is unable to pick up. Our approach helps settle what in the literature was an important but controversial finding. More generally, we corroborate some of the recent results by Gilbert (2018) suggesting there is some causality between index investment and non-ferrous metals and some agricultural commodities, albeit commodity-specific and in a milder form concentrated in the aftermath of the GFC. The robustness of the test herein offers some clarity to an academic literature that has been settling against the efficacy and wider applicability of Singleton’s results but has not been persuasive enough to see the same views become pervasive among finance practitioners.

Keywords

Status: accepted

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