The Impact of Index Funds in Commodity Futures Markets: A Systems Approach

Abstract

This article addresses the debate regarding the role of index funds in commodity futures markets. Many have argued that index funds are speculators that are responsible for bubbles in commodity futures prices. The argument is based on the premise that the sheer size of index investment can overwhelm the normal functioning of these markets. Importantly, an empirical linkage must be made between commodity index fund positions and prices, or there is no obvious mechanism by which a bubble can form. The authors’ empirical analysis uses new data from the U.S. Commodity Futures Trading Commission contained in the “Disaggregated Commitments of Traders” report. Grangerstyle causality regressions provide no convincing evidence that positions held by swap dealers impact market returns. Surprisingly, the results do suggest that larger commodity index positions are associated with declining market volatility, although these results may be market specific.