Market sentiment in commodity futures returns |
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| Affiliation: | 1. University of Luxembourg, Luxembourg School of Finance, 4 rue Albert Borschette, L-1246, Luxembourg;2. University of St. Gallen, Swiss Institute of Banking and Finance, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland;1. Aston Business School, Aston University, Aston Triangle, Birmingham B4 7ET United Kingdom;2. Department of Economics, University of Patras, University Campus, Rio 26504 Greece;1. Department of Civic Education and Leadership, National Taiwan Normal University, Taiwan;2. Ampang Traffic Enterprise Co., Ltd., Taiwan;3. Department of Finance, National Kaohsiung University of Applied Science, No.58, Shenzhong Rd., Yanchao Dist., Kaohsiung City 824, Taiwan;1. School of Management, Harbin Institute of Technology, Harbin 150001, China;2. Naveen Jindal School of Management, University of Texas at Dallas, TX 75080, USA |
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| Abstract: | We identify a strong presence of sentiment exposure in commodity futures returns. Sentiment is able to provide additional explanatory power for comovement among commodity futures beyond the macro- and equity-related sources. Commodity futures with low open interest growth, high volatilities, low momentum, or low futures basis are more sensitive to change in sentiment. Similar to Baker and Wurgler (2006), we construct a market sentiment index by Partial Least Squares regressions (PLS) with non-return based stock market proxies, in particular higher moments of the option implied return distribution. Moreover, our sentiment index can be built on a daily basis. |
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