What do movements in financial traders’ net long positions reveal about aggregate stock returns? |
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| Institution: | 1. Département des sciences administratives, Université du Québec (Outaouais), Campus St. Jérôme, 5 rue St Joseph, St Jérôme, Québec J7Z 0B7, Canada;2. Université du Québec (Montréal), École des sciences de la gestion, 315 Ste.-Catherine est, R-2915, Montréal, Québec H2X 3X2, Canada;3. Chaire d’information financière et organisationnelle (Université du Québec à Montréal), and Université du Québec en Outaouais, Canada;1. Division of Business Administration, College of Business, Chosun University, 309 Pilmun-daero, Dong-gu, Gwangju 501-759, South Korea;2. School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 06974, South Korea;3. Department of Business Management, Osan University, 45 Cheonghak-ro, Osan-si, Gyeonggi-do 18119, South Korea;4. Price College of Business, University of Oklahoma, 307 West Brooks, Norman, OK 73019, United States;1. Department of Finance and Insurance, Miller College of Business, Ball State University, Muncie, IN 47306, United States;2. Department of Accounting, University of St. Thomas, St. Paul, MN 55105, United States;1. Department of Economics and Lau Chor Tak Institute of Global Economics and Finance, The Chinese University of Hong Kong, Hong Kong;2. Department of Economics, University of Cincinnati, United States;3. Department of Economics, The Chinese University of Hong Kong, Hong Kong;1. Faculty of Management, Multimedia University, Persiaran Multimedia, 63100 Cyberjaya, Selangor, Malaysia |
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| Abstract: | Previous financial economics studies have successfully identified the existence of informed trading in futures markets; however, there is no study on the specific type of strategy chosen by informed agents to maximize profits. To fill this gap in the literature, we investigate the importance of movements in futures traders’ net long positions in predicting aggregate equity market returns. This study finds that movements in the net long positions of bond, commodity, and stock futures traders are strong predictors of aggregate stock returns as they outperform a large number of popular return predictors both in and out of sample. In addition, a one-standard-deviation change in futures traders’ net long positions can lead to an increase (decrease) of up to 3.4% (4.12%) in annualized market excess equity returns. The study’s first-order autocorrelation results reveal an absence of persistence in the net long predictors. A vector autoregression decomposition shows that the economic source of financial traders’ net long position predictive power stems predominantly from the discount rate and cash flow channels. Overall, the study finds that financial traders are informed traders who are able to anticipate future aggregate cash flows and associated discount rate news. |
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| Keywords: | Commodities Net-long position Futures markets Financial traders Hedging-pressure E31 E37 F31 G12 G13 |
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