Market sentiment in commodity futures returns

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.

The quantile dependence of commodity futures markets on news sentiment

“…The results are reported in Panel A of Table 3. Similar to Gao and Süss (2015) and Smales (2014b), we observe an asymmetric nature of the market reaction against positive and negative sentiments, as the market is more strongly associated with the negative component of news sentiment than the positive. To examine this outcome further, we conduct a statistical test that compares the coefficients obtained for the positive and negative components (Table 3, Panel B) and find statistical support for the difference in the degree of dependence.…”

“…In addition, similar to the findings of Gao and Süss (2015) and Smales (2014b), the study finds an asymmetric nature of the market reaction against positive and negative sentiments; more specifically, the market is more strongly associated with the negative news component than it is with the positive news component. In addition, similar to the findings of Gao and Süss (2015) and Smales (2014b), the study finds an asymmetric nature of the market reaction against positive and negative sentiments; more specifically, the market is more strongly associated with the negative news component than it is with the positive news component.…”

“…A welldocumented phenomenon is the asymmetric nature of short-term market responses to news, as negative news tends to have a stronger market reaction than positive news does (Gao & Süss, 2015;Smales, 2014b). Research has found that news sentiment is central to understanding short-term market fluctuations.…”

“…The extant literature tests nonuniform reactions only, as they either divide the sample by the overall daily sentiment (e.g., Borovkova, 2015;Gao & Süss, 2015), or relate to the signs of futures returns and macroeconomic states like periods of expansion and contraction, without considering the direction of the pricing vector (e.g., Boyd et al, 2005;Elder, Miao, & Ramchander, 2012;Smales, 2014b;Zheng, 2015). First, the market reaction to disaggregated market sentiment (i.e., both positive and negative components) is examined in light of market conditions at different return quantiles.…”

“…Research has found that news sentiment is central to understanding short-term market fluctuations. A welldocumented phenomenon is the asymmetric nature of short-term market responses to news, as negative news tends to have a stronger market reaction than positive news does (Gao & Süss, 2015;Smales, 2014b). This finding is an average result and raises questions concerning whether other parts of the return distribution are similarly affected and whether overall market direction influences these results.…”