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Title: The role of investor sentiment in commodity price behaviour: some evidence via time-varying causality tests Authors:  Mario Lupoli - University of St Andrews (United Kingdom)
Roderick McCrorie - University of St Andrews (United Kingdom) [presenting]
Abstract: A standard Granger-causality test has been previously used to provide evidence of causality from index investment to non-ferrous metals and some agricultural commodity prices. The results support that money flows associated with index investors helped predict changes in crude oil futures prices. We examine the robustness of such results using a more powerful and encompassing causality testing strategy based on another test which allows the causality measure to be time-varying. This helps gauge the magnitude of the causal relation from index investment to log-returns and pinpoints when it is statistically significant. We confirm the key finding of causality, albeit in a milder form, from index investment to some non-ferrous metals and agricultural commodities but find the causal relation is measured significantly only around the Global Financial Crisis and other identifiable dates. This highlights that standard causality tests can be affected by extreme price behaviour and that apposite testing strategies should be used. A granularity is offered that helps clarify an academic literature that has been settling against the efficacy and wider applicability of the Singleton result but has not proved persuasive enough to see the same view become pervasive among finance practitioners.