The valuation effects of index investment in commodity futures
We identify and date a significant surge in the amount of investment tracking commodity futures indices, a phenomenon identified heretofore with anecdotal or visual evidences. Using a difference-in-differences setting on cumulative abnormal log price changes, computed with several benchmarks during the roll window of the SP-GSCI, we first find that the uncovered break in the speculative investment structure had an alleviating effect. Second, we explain the abnormal nearby and first deferred contracts price changes by measures of risk (liquidity) premium required at long (short) term horizon by speculative (hedging) activity. Finally, in a cruder market efficiency framework, we find that transaction costs incurred by an arbitrager (price taker) explain most of the abnormal term-structure change with a coefficient close to unity. In addition, this abnormal change -which is of 17 basis points at most- is never significant once we adjust the standard errors for event-induced variance and cross-correlation.