Capturing the Risk Premium of Commodity Futures: The Role of Hedging Pressure
Université Lille Nord de France - Skema Business School
EDHEC Business School
February 11, 2009
Journal of Banking and Finance, Vol. 37, No. 7, 2013
We construct long-short factor mimicking portfolios that capture the hedging pressure risk premium of commodity futures. We consider single sorts based on the open interests of either hedgers or speculators, as well as double sorts based on both positions. The long-short hedging pressure portfolios are priced cross-sectionally and offer Sharpe ratios that systematically exceed those of long-only benchmarks. Further tests show that the hedging pressure risk premiums rise with the volatility of commodity futures markets and that the predictive power of hedging pressure over cross-sectional commodity futures returns is different from the previously documented forecasting power of past returns and the slope of the term structure.
Number of Pages in PDF File: 37
Keywords: Commodity, Risk premium, Hedging pressure, Term structure, Momentum
JEL Classification: G13, G14
Date posted: February 12, 2009 ; Last revised: November 10, 2015
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