Hedging pressure effects in futures markets

Frans A. De Roon, Theo E. Nijman, Chris Veld

Research output: Contribution to journalArticleResearchpeer-review

200 Citations (Scopus)

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 aftect 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.

Original languageEnglish
Pages (from-to)1437-1456
Number of pages20
JournalJournal of Finance
Volume55
Issue number3
DOIs
Publication statusPublished - 1 Jan 2000
Externally publishedYes

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