Essays on the effects of index trading on asset prices

• Author / Creator

  DeCoste, Joseph

• In the first essay, I explore whether excess demand in commodity futures markets affects the spot price of oil. I use a sign restricted vector autoregressive oil market model that explicitly includes futures markets. This model allows for the detection of futures demand effects which feedback into spot prices through a price signaling channel, in contrast to previous studies relying solely on an inventory channel. I find novel evidence that excess demand in futures markets drives over half of the short run variation in the spot price of oil, and can explain puzzling incidents of oil price behavior such as the 2008 boom and bust in oil prices and the 2014 oil price crash. I find that this relationship is much stronger after 2003, the period commonly associated with a rise in financialization and commodity index investment.

  In the second essay, I test for the existence of excessive comovement amongst stocks in the S\&P 500. Using a fuzzy regression discontinuity approach, I show that membership in the S\&P 500 leads to significant positive excess comovement in the long term. I evaluate a traditional, liquidity based explanation and a friction based explanation, and find no evidence that liquidity drives excess comovement. I show that the lack of evidence for excess comovement shown in Chen, Singal, Whitelaw (2016) is due to heterogeneous effects on newly included firms versus established members. One potential explanation is that investors take time to fully integrate the new stock into the group immediately after inclusion, reducing observed increases in comovement in the short term. Another is that firm inclusion is related to a change in fundamentals. These results constitute new evidence of frictions when exposed to large classes of traders with correlated, non-fundamental demands, such as those populating the S\&P 500.

  In the third essay, I test for the existence of excess coskewness amongst stocks in the S\&P 500. Using a combination of event study and fuzzy regression discontinuity approaches, I show that membership in the S\&P 500 leads to significant negative excess coskewness in the long term, but positive excess coskewness in the short term, pointing to important transitory effects of inclusion that differ from persistent long term effects. These coskewness results point to price distortions caused by index membership, with implications for both market and allocative efficiency, and diversification benefits.

• Subjects / Keywords

  • Financialization
  • Futures Markets
  • Commodity Markets
  • Structural Model

• Graduation date

  Fall 2022

• Type of Item

  Thesis

• Degree

  Doctor of Philosophy

• DOI

  https://doi.org/10.7939/r3-ke30-8712

• License

  This thesis is made available by the University of Alberta Library with permission of the copyright owner solely for non-commercial purposes. This thesis, or any portion thereof, may not otherwise be copied or reproduced without the written consent of the copyright owner, except to the extent permitted by Canadian copyright law.