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Hedging pressure effects in futures markets

Listed author(s):
  • de Roon, F.A.

    (Tilburg University, School of Economics and Management)

  • Nijman, T.E.

    (Tilburg University, School of Economics and Management)

  • Veld, C.H.

    (Tilburg University, School of Economics and Management)

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.

(This abstract was borrowed from another version of this item.)

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Paper provided by Tilburg University, School of Economics and Management in its series Other publications TiSEM with number 3dfe2c9f-3194-4751-9b34-12828163330e.

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Date of creation: 2000
Publication status: Published in Journal of Finance (2000), v.55, nr.3, p.1437-1456
Handle: RePEc:tiu:tiutis:3dfe2c9f-3194-4751-9b34-12828163330e
Contact details of provider: Web page: https://www.tilburguniversity.edu/about/schools/economics-and-management/

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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
  2. Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983. "Efficient Asset Portfolios and the Theory of Normal Backwardation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 319-331, April.
  3. Anderson, Ronald W & Danthine, Jean-Pierre, 1981. "Cross Hedging," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1182-1196, December.
  4. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  5. 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.
  6. 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.
  7. 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..
  8. 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 637-667.
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