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Capturing the Risk Premium of Commodity Futures: The Role of Hedging Pressure

Devraj Basu

Skema Business School

Joelle Miffre

EDHEC Business School

February 11, 2009

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: 38

Keywords: Commodity, Risk premium, Hedging pressure, Term structure, Momentum

JEL Classification: G13, G14

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Date posted: February 12, 2009 ; Last revised: January 9, 2013

Suggested Citation

Basu, Devraj and Miffre, Joelle, Capturing the Risk Premium of Commodity Futures: The Role of Hedging Pressure (February 11, 2009). Available at SSRN: http://ssrn.com/abstract=1340873 or http://dx.doi.org/10.2139/ssrn.1340873

Contact Information

Devraj Basu
Skema Business School ( email )
Avenue Willy Brandt
Lille, 59777
Joelle Miffre (Contact Author)
EDHEC Business School ( email )
58 rue du Port
Lille, 59046
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