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Hedging Pressure Effects in Futures Markets

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Author Info
Frans A. de Roon (Erasmus University Rotterdam,)
Theo E. Nijman (Center for Economic Research at Tilburg University)
Chris Veld (Center for Economic Research at Tilburg University)

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Abstract

We present a simple model implying that futures risk premia depend on both own-market and cross-market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups (financial, agricultural, mineral, and currency) indicates that, after controlling for systematic risk, both the futures own hedging pressure and cross-hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model. Copyright The American Finance Association 2000.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 55 (2000)
Issue (Month): 3 (06)
Pages: 1437-1456
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Handle: RePEc:bla:jfinan:v:55:y:2000:i:3:p:1437-1456

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  1. Claude B. Erb & Campbell R. Harvey, 2005. "The Tactical and Strategic Value of Commodity Futures," NBER Working Papers 11222, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Sanders, Dwight R. & Boris, Keith, 2000. "Does The Cftc Commitments Of Traders Report Contain Useful Information?," 2000 Conference, April 17-18 2000, Chicago, Illinois 18929, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  3. Frank de Jong & Frans A. de Roon, 2001. "Time-Varying Market Integration and Expected Returns in Emerging Markets," Tinbergen Institute Discussion Papers 01-113/2, Tinbergen Institute. [Downloadable!]
  4. Frans A. de Roon & Rob W. J. van den Goorbergh & Theo E. Nijman, 2004. "An Anatomy of Futures Returns: Risk Premiums and Trading Strategies," WO Research Memoranda (discontinued) 757, Netherlands Central Bank, Research Department. [Downloadable!]
  5. Roon, F.A. de & Nijman, T.E. & Werker, B.J.M., 1999. "Currency hedging for international stock portfolios : a general approach," Discussion Paper 123, Tilburg University, Center for Economic Research. [Downloadable!]
  6. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2007. "The Fundamentals of Commodity Futures Returns," NBER Working Papers 13249, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Roon, F.A. de & Nijman, T.E. & Werker, B.J.M., 2000. "Currency Hedging for International Stock Portfolios," Research Paper ERS-2000-21-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  8. de Jong, Frank & de Roon, Frans, 2001. "Time-Varying Market Integration and Expected Returns in Emerging Markets," CEPR Discussion Papers 3102, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Jong, F. de & Roon, F.A. de, 2001. "Time-varying market integration and expected returns in emerging markets," Discussion Paper 78, Tilburg University, Center for Economic Research. [Downloadable!]
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