Is There Smart Money? How Information in the Commodity Futures Market Is Priced into the Cross-Section of Stock Returns with Delay

Abstract

We document a new empirical phenomenon in which the positions of managed money (MM) traders, who are sophisticated speculators in the commodity futures market, as disclosed by the CFTC Disaggregated Commitments of Traders (DCOT) reports, can predict the cross-section of commodity producers' stock returns in the subsequent week. We employ empirical methodologies including single-sort, Jensen's alpha analysis, double-sort, and Fama-Macbeth regressions to confirm the predictability results. The results are more pronounced in firms with higher information asymmetry, proxied by analyst dispersion and historical volatility. We thus provide more empirical evidence to the literature on investor specialization, market segmentation, informational friction and gradual information diffusion, since after all, it is costly to acquire and process information and as a result investors do not specialize in all assets (Van Nieuwerburgh and Veldkamp, 2010). Our main results are not driven by the announcement effect of the DCOT reports.