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Capturing the risk premium of commodity futures: The role of hedging pressure

Author

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  • Basu, Devraj
  • Miffre, Joëlle
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 hedgers or speculators, as well as double sorts based on both positions. The long–short hedging pressure portfolios are priced cross-sectionally and present 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.

Suggested Citation

  • Basu, Devraj & Miffre, Joëlle, 2013. "Capturing the risk premium of commodity futures: The role of hedging pressure," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2652-2664.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2652-2664
    DOI: 10.1016/j.jbankfin.2013.02.031
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Commodity risk premium; Hedging pressure; Term structure; Momentum;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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