Hedging pressure and delivery risk explanations of futures risk premia

Abstract

Empirical evidence of the hedging pressure risk premium exists only in the futures contracts with delivery-related options. Since hedging pressure is supposed to exist for all futures contracts, the empirical evidence raises an interesting empirical question: whether the hedging pressure risk premium is in fact the risk premium associated with the delivery-related options. This chapter contains an empirical test of the non-redundancy between the two related but alternative sources of non-market risks. For the test, we employs a futures risk premia model in which the expected futures returns contain the market risk premium (proxied by the equity market risk premium) and two non-market risk premia (proxied by the hedging pressure effect and by the delivery risk premium reflected in the returns of futures options, respectively). Our main finding is that both the hedging pressure and the delivery risk premia are non-redundant and statistically significant for futures contracts with delivery-related options. This finding implies a substantial degree of segmentations between these futures markets and the underlying asset markets.

Citation

Roongsangmanoon, C., Chen, A.H., Kang, J. and Lien, D. (2009), "Hedging pressure and delivery risk explanations of futures risk premia", Chen, A.H. (Ed.) Research in Finance (Research in Finance, Vol. 25), Emerald Group Publishing Limited, Leeds, pp. 303-331. https://doi.org/10.1108/S0196-3821(2009)0000025013