A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets

Abstract

This paper studies the dynamic relation between position changes and short-horizon returns in commodity futures markets. Speculators follow momentum strategies and trade more impatiently than hedgers, who trade as contrarians. Commodity futures prices predictably increase (decrease) following hedgers’ buying (selling) activity. This predictability is stronger when hedgers face more binding funding constraints and higher inventory pressure. These findings are consistent with the view that hedgers receive compensation for providing liquidity to speculators.