The Journal of Finance

Hedging Pressure Effects in Futures Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00253

Frans A. De Roon, Theo E. Nijman, Chris Veld

We present a simple model implying that futures risk premia depend on both own‐market and cross‐market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups (financial, agricultural, mineral, and currency) indicates that, after controlling for systematic risk, both the futures own hedging pressure and cross‐hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model.

Testing for Mean‐Variance Spanning with Short Sales Constraints and Transaction Costs: The Case of Emerging Markets

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00343

Frans A. De Roon, Theo E. Nijman, Bas J. M. Werker

We propose regression‐based tests for mean‐variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small‐sample bias, this bias appears to be too small to affect our conclusions.