Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets
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What they found
Bessembinder tested whether futures returns are explained by systematic risk (beta to the stock market) or by hedging pressure (the net position of commercial hedgers, who pay speculators to take the other side). Using 22 futures markets from 1967 to 1989, he found little evidence that market beta explains futures returns but strong evidence that hedging pressure does: markets where hedgers were net short offered positive returns to long speculators, and vice versa. This gave empirical support to Keynes's 'normal backwardation' theory of futures risk premia.
What you can use
- Speculators in futures are paid for absorbing the risk hedgers want to shed; the direction of that payment depends on which way hedgers lean.
- The Commitments of Traders report is the data behind this: net commercial positioning has historically predicted risk premia.
- Futures returns are not much explained by stock-market beta, which is why they diversify an equity portfolio.
Caveats
Sample ends 1989; the composition of futures market participants has changed enormously with index investors. Effects are modest in size.
Tags: futures, hedging-pressure, risk-premium, commitments-of-traders
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.