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Hedging Pressure Effects in Futures Markets

  • 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)

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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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. Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," CUDARE Working Paper Series 133R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  2. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  3. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
  4. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
  5. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-96, December.
  6. Hendrik Bessembinder, 1993. "An empirical analysis of risk premia in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(6), pages 611-630, 09.
  7. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  8. Chang, Eric C, 1985. " Returns to Speculators and the Theory of Normal Backwardation," Journal of Finance, American Finance Association, vol. 40(1), pages 193-208, March.
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