Bahattin Buyuksahin (U.S. Commodity Futures Trading Commission, Washington)

We provide direct empirical evidence that who trades helps explain the joint distribution of commodity and equity returns. Using a unique dataset of all large trader positions in 17 US commodity and equity futures markets from 2000 to 2010, we show that the correlations between the returns on commodity and equity indices increase significantly amid greater activity by speculators in general and one type of traders in particular – hedge funds. We also find that the impact of hedge fund activity is lower during periods of financial market stress. Our results support the notion that the composition of trading activity matters for asset pricing. They also have important implications for the debate on the “financialization” of commodity markets. The CFTC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees or consultants. The views expressed herein are those of the authors only and do not necessarily reflect the views of the CFTC, the Commissioners, or other staff at the Commission. Errors or omissions, if any, are the authors' sole responsibility.