Hedging Pressure Effects in Futures Markets

Authors

  • Frans A. De Roon,

  • Theo E. Nijman,

  • Chris Veld

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    • De Roon is from Erasmus University Rotterdam. Nijman and Veld are from the CentER for Economic Research at Tilburg University. We appreciate the comments made by an anonymous referee, René Stulz (the editor), Frank de Jong, Miguel Rosellon, and Bas Werker. Helpful comments have also been received from seminar participants at Tilburg University, Tübingen University, the University of Groningen, and the University of Maastricht.

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.

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