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Abstract

Commodity index investment has increased dramatically since 2004 and aroused an intense debate about the market impact of these investment flows on futures prices. Due to data scarcity some studies rely on mapping algorithms to infer index positions in WTI crude oil futures from agricultural commodities and find an economically large and statistically significant impact of index positions on crude oil futures prices. This paper provides direct evidence that the identified impact of index investment from mapping algorithms is spurious, with the entire forecasting power coming from 2008. Mapping algorithms implicitly assume annually fixed ratios in index positions between WTI crude oil and agricultural commodities, which generally does not hold. An idiosyncratic spike in agricultural index positions during 2008, coupled with the spike in oil prices, causes the spurious impact of index investment on crude oil futures prices found in earlier studies.

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