Open Interest in Futures Markets Predicts Stock, Bond, Commodity and Currency Prices, says study

January 31, 2011


What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?

Harrison G. Hong , Motohiro Yogo

AFA 2010 Atlanta Meetings Paper


Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical and predict asset-price fluctuations better than a number of alternative variables including past prices. In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open interest is a more informative signal of future economic activity and inflation than past prices because of hedging demand and downward-sloping demand curves in futures markets.

Keywords: Bonds, Business cycle, Commodities, Currencies, Futures markets, Inflation

Source : SSRN

Related Posts Plugin for WordPress, Blogger...

Popularity: 1% [?]


Previous post:

Next post: