WHAT DOES FUTURES MARKET INTEREST TELL US ABOUT THE MACROECONOMY AND ASSET PRICES?

Open interest, or the amount of contracts outstanding in futures markets, has remarkable power to
forecast commodity, currency, bond, and stock prices. Changes in open interest are highly pro-cyclical
and predict asset-price fluctuations better than a number of alternative variables including past prices.
In commodity markets, rising open interest predicts rising commodity prices, falling bond prices, and
a rising short rate. In currency markets, rising open interest predicts appreciation of foreign currencies
relative to the U.S. dollar. In bond and stock markets, rising open interest predicts falling bond prices
and rising stock prices, respectively. We offer a theoretical explanation of our empirical findings. Open
interest is a more informative signal of future economic activity and inflation than past prices because
of hedging demand and downward-sloping demand curves in futures markets.