Testing Overreaction and Under-reaction in the Commodity Futures Market

• Main Author: DAI, Jingyu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: commodity futures; overreaction; under-reaction; agriculture; private information; behavioural finance; Agribusiness; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/etd_coll/89; https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=1085&context=etd_coll
• Institution: Singapore Management University

Results from previous studies testing for under-reaction and overreaction in the commodity futures market are mixed and inconclusive. Using a data of more than 20 categories of future contacts ranging from agricultural, metal and energy, we have found significant evidence of under-reaction in food and agricultural commodities but not in the energy and metal sector. It is also found that those relatively inactive commodity future contracts tend to have a stronger tendency to under-react than commodity future contracts are very actively traded. The result also agrees with the behavioral hypothesis that under-reaction is caused by gradual incorporation of information among investors.