Steven Wei Ho (Finance, Business) had a paper (co-authored with Alexandre Lauwers at The Graduate Institute, Geneva): “Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay,” accepted for publication by the Journal of Financial and Quantitative Analysis, which is a premier business journal listed in the prestigious Financial Times 50 journal list. The author has previously published in journals such as the American Economic Review. This piece of research is the first to document an empirical phenomenon in which the aggregate positions of money managers (MM), who are sophisticated speculators in the commodity futures market, as disclosed by the Disaggregated Commitments of Traders (DCOT) reports, can predict the cross-section of commodity producers’ stock returns in the subsequent week. This lead-lag relationship is consistently confirmed through a number of empirical methodologies and across a range of signal measures, time lags, and weighting schemes. This documented finding generates economically large and statistically significant abnormal returns, ranging from 10% to 13% a year, with respect to various commonly-used factor models, and to the inclusion of additional commodity price factors capturing common commodity futures strategies such as futures momentum, basis, index, and the newly discovered basis-momentum, or the principal components of commodity returns.
Furthermore, the paper finds that on average MM position change signals capture relevant information beyond the information already contained in past commodity futures returns and hence are not merely reflecting the positions of traders within MM who simply follow the trend signal. The paper also shows that a mechanical link between the equity returns of commodity-producing firms and the contemporaneous futures returns is not driving the results, nor do the findings arise from the announcement effects of the DCOT reports, nor are results confined to small-cap stocks. The results are more pronounced in firms with higher information asymmetry, as proxied by analyst dispersion and historical volatility. This work thus presents in a novel setting more empirical evidence supporting the research on complexity and return delay that finds significant return predictability can arise as a result of investors’ limited information processing capacity.
