Testing the Masters Hypothesis in commodity futures markets

The 'Masters Hypothesis' is the claim that long-only index investment was a major driver of the 2007-2008 spike in commodity futures prices and energy futures prices in particular. Index position data compiled by the CFTC are carefully compared. In the energy markets, index position estimates based on agricultural markets are shown to contain considerable error relative to the CFTC's Index Investment Data (IID). Fama-MacBeth tests using the CFTC's quarterly IID find very little evidence that index positions influence returns or volatility in 19 commodity futures markets. Granger causality and long-horizon regression tests also show no causal links between daily returns or volatility in the crude oil and natural gas futures markets and the positions for two large energy exchange-traded index funds. Overall, the empirical results of this study offer no support for the Masters Hypothesis.