Macroeconomic conditions, speculation, and commodity futures returns

This paper examines the dynamic relationships between speculative activities, commodity returns, and macroeconomic conditions across five sectors compassing 29 commodities. Using weekly data spanning from January 2000 to July 2023, we construct comprehensive measures of commodity market speculation across five sectors and examine their sector-specific impact on returns through advanced econometric methods, including dynamic conditional correlation models, quantile regressions, Markov-switching models, and time-varying Granger causality tests. Our results reveal that the impact of speculative activities on commodity futures returns is conditional on the commodity sector and prevailing macroeconomic conditions. Moreover, the relationship between macroeconomic factors, speculative activities, and commodity futures returns is time varying. Among the macroeconomic variables, the financial stress indicator, as measured by the St. Louis Fed Financial Stress Index, shows a significant ability to predict commodity futures returns. The relationship between speculation and commodity returns is bi-directional across all sectors.