Empirical Study On Relationship Between China Commodity Return And Future Market Open Interest

In1990, China established the Zhengzhou Commodity Exchange, which openedthe development of China’s commodity futures markets. This paper constitutes a startfrom China commodity futures markets and then made a brief review of the history ofthe world and China’s commodity futures market, also made longitudinal analysis of thephase characteristics of Chinese commodity futures markets. From analysis, weconclude that future price has always reflected market situation and investor’s emotion.No matter investor, hedger or speculator, all of them are paying more and moreattention to predict commodity return.From literature review, we found that Economist have always believed that pricemomentum, basis and other macroeconomic indicators such as short rate, yield spreadwould predict commodity price return. However, Harrison Hong and Motohiro Yogofound that open interest in US market can be used to explain and predict UScommodity future market because of futures market’s hedging demand.China Researchers also did some research on relationship between future marketreturn and open interest. However, they only pick one or two trading varieties such ascopper or aluminium. The findings can’t reflect whole China commodity future marketsituation. In this paper, we choose the all40trading varieties in China and madeempirical study on relationship between growth rate of open interest and commoditymarket return. We found that growth rate of open interest have positive relationshipwith commodity price return. It could be used to explain commodity future marketreturn. Moreover, this finding would offer a different method for people to make tradingstrategies on commodity futures.