Hedging pressure momentum and the predictability of oil futures returns

In this paper, we distinguish the long- and short-term components of hedging pressure with the help of momentum rules and combine these components using the scaled principal component analysis (SPCA) to propose a hedging pressure momentum (HPM) index. Using data from January 1994 to June 2021, our empirical results indicate that the HPM index has a strong ability to predict oil futures returns with a significantly positive out-of-sample R2 of 0.946%. Moreover, the forecasting performance of HPM is higher than that of existing popular predictors. We find that the predictive power of our HPM index is partly derived from the channel of investor sentiment. Our findings on return predictability are robust under different settings that include various forecasting horizons, futures maturities, and multivariate information methods.