Destabilizing or passive? The impact of commodity index traders on equilibrium prices

Sun, Hang; Bos, Jaap.W.B.; Rodrigues, Paulo Henrique Mazza

doi:10.1016/j.iref.2022.08.014

Cited by 6 publications

(1 citation statement)

References 31 publications

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“…Boos and Grob (2022) investigate the trading strategies of managed futures funds, Sakkas and Tessaromatis (2020) evaluate factor-based commodity futures investment, and Kwon et al (2020) evaluate model momentum. Sun et al (2023) examine the price impact of traders on commodity futures. Tokyo platinum contracts also feature in recent published research.…”

Section: Introductionmentioning

confidence: 99%

Causality between Arbitrage and Liquidity in Platinum Futures

Iwatsubo

Watkins

2022

JRFM

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Arbitrage and liquidity are interrelated. Liquidity facilitates arbitrageurs’ trading on deviations from the law of one price. However, whether arbitrage opportunity leads to an increase or decrease in liquidity depends on the cause of the deviation. A demand shock leads to greater liquidity, while asymmetric information is toxic to liquidity. We examine how arbitrage and liquidity influence each other in the world’s largest platinum futures markets on exchanges in New York and Tokyo. The markets provide an interesting institutional setting because the futures are based on an identical underlying commodity but exhibit different liquidity characteristics both intraday and over their lifespans. Using intraday data, we find that deviation in currency-adjusted futures prices leads, on average, to an immediate increase in liquidity, suggesting that demand shocks are the dominant driver of arbitrage opportunities. Less actively traded futures experience a greater liquidity effect. Arbitrageurs improve liquidity in both New York and Tokyo by acting as discretionary liquidity traders and cross-sectional market-makers.

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