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

37 Pages Posted: 12 Feb 2009 Last revised: 10 Nov 2015

See all articles by Devraj Basu

Devraj Basu

SKEMA Business School - Lille Campus

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Date Written: February 11, 2009

Abstract

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.

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

JEL Classification: G13, G14

Suggested Citation

Basu, Devraj and Miffre, Joelle, Capturing the Risk Premium of Commodity Futures: The Role of Hedging Pressure (February 11, 2009). Journal of Banking and Finance, Vol. 37, No. 7, 2013. Available at SSRN: https://ssrn.com/abstract=1340873 or http://dx.doi.org/10.2139/ssrn.1340873

Devraj Basu

SKEMA Business School - Lille Campus ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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