What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?

Harrison Hong, Motohiro Yogo

NBER Working Paper No. 16712
Issued in January 2011
NBER Program(s):   AP   IFM

Economists have traditionally viewed futures prices as fully informative about future economic activity and asset prices. We argue that open interest could be more informative than futures prices in the presence of hedging demand and limited risk absorption capacity in futures markets. We find that movements in open interest are highly pro-cyclical, correlated with both macroeconomic activity and movements in asset prices. Movements in commodity market interest predict commodity returns, bond returns, and movements in the short rate even after controlling for other known predictors. To a lesser degree, movements in open interest predict returns in currency, bond, and stock markets.

Published: Hong, Harrison & Yogo, Motohiro, 2012. "What does futures market interest tell us about the macroeconomy and asset prices?," Journal of Financial Economics, Elsevier, vol. 105(3), pages 473-490.

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This paper was revised on June 27, 2012

Acknowledgments

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