Speculative pressure

• Date: 01 April 2020
• Author: Adrian Fernandez‐Perez,John Hua Fan,Joëlle Miffre,Ana‐Maria Fuertes
• DOI: http://doi.org/10.1002/fut.22085
• Published date: 01 April 2020

J Futures Markets. 2020;40:575–597. wileyonlinelibrary.com/journal/fut © 2019 Wiley Periodicals, Inc.

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575

Received: 6 May 2019

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Accepted: 27 November 2019

DOI: 10.1002/fut.22085

RESEARCH ARTICLE

Speculative pressure

John Hua Fan

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Adrian Fernandez‐Perez

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Ana‐Maria Fuertes

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Joëlle Miffre

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1

Department of Accounting, Finance and

Economics, Griffith Business School,

Griffith University, Brisbane, Australia

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Department of Finance, Auckland

University of Technology, Auckland,

New Zealand

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Faculty of Finance, Cass Business School,

City University of London, London, UK

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Faculty of Finance, Audencia Business

School, Nantes, France

Correspondence

Adrian Fernandez‐Perez, Auckland

University of Technology, Private Bag

92006, 1142 Auckland, New Zealand.

Email: adrian.fernandez@aut.ac.nz

Funding information

Europlace Institute of Finance/Institut

Louis Bachelier, Grant/Award Number:

Programmes de Recherche 2017; Griffith

Center for Personal Finance and

Superannuation, Grant/Award Number:

2018

Abstract

The paper investigates the information content of speculative pressure across

futures classes. Long‐short portfolios of futures contracts sorted by speculative

pressure capture a significant premium in commodity, currency, and equity

markets but not in fixed income markets. Exposure to commodity, currency,

and equity index futures’speculative pressure is priced in the broad cross‐

section after controlling for momentum, carry, global liquidity, and volatility

risks. The findings are confirmed by robustness tests using alternative

speculative pressure signals, portfolio construction techniques, and subperiods

interalia. We argue that there is an efficient hedgers‐speculators risk transfer in

commodity, currency, and equity index futures markets.

KEYWORDS

futures markets, pricing, risk premium, speculative pressure

JEL CLASSIFICATION

G13; G14

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INTRODUCTION

A well‐established theory on commodity futures pricing hinges on the hedging pressure hypothesis of Cootner (1960)

and Hirshleifer (1988).

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The key contention of this “insurance mechanism”theory is that the prices of commodity

futures are driven by the net positions of hedgers and speculators. When hedgers are net short, futures prices are low

relative to their expected values at maturity to entice net‐long speculation, a market condition known as backwardation.

When hedgers are net‐long, futures prices are high relative to their expected values at maturity to induce net short

speculation, which is known as contango. Accordingly, by taking opposite positions to those of hedgers, speculators

earn a premium as compensation for bearing the price risk of hedgers.

The theoretical motivation for the hedging pressure hypothesis is largely confined to commodities, however, it

is possible that speculative (hedging) pressure influences the price formation process in other futures markets.

Firms that issue and invest in foreign currency‐denominated securities or that engage in cross‐border trades

typically want to hedge their foreign exchange exposure. Likewise, ahead of anticipated market fluctuation, fixed

income, and equity managers may want to tactically hedge their spot exposure by taking an opposite position in

futures markets. Asset managers and index providers may need to hedge their products in the face of customers’

early redemptions. In all these financial futures markets too, speculators may claim a premium as insurance

suppliers. Using as a signal the past net‐long positions of large noncommercial participants over their total

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The hedging pressure hypothesis generalizes the normal backwardation theory of Keynes (1930) and Hicks (1939). Normal backwardation argues that hedgers are normally net short as commodity

producers are more prone to hedge their price risk than commodity consumers.

positions (speculative pressure signal, hereafter), we test this conjecture by conducting empirical tests of whether

speculators receive a premium for shouldering the price risk of hedgers in commodity, currency, equity index, and

fixed income futures markets.

For this purpose, we begin by constructing fully collateralized portfolios that take long(short) positions in the futures with

the most positive (negative) speculative pressure. To our best knowledge, no other paper in the literature studies the

performance and risk profile of long‐short speculative pressure portfolios in futures markets for instruments beyond

commodities. Thus, we extend the portfolio study of Basu and Miffre (2013) to currency, equity, and fixed income futures

markets. We investigate the nature of the speculative pressure risk premium thus captured i n the context of “everywhere”

tradeable factors based on general market movements—the momentum and value factors documented in Asness,

Moskowitz, and Pedersen (2013) and the carry factor of Koijen, Moskowitz, Pedersen, and Vrugt (2018). Next, we seek to

understand the drivers of the speculative pressure risk premia across futures classes by testing for the presence of a common

structure. Finally, we address the question of whether exposure to the class‐specific and “everywhere”speculative pressure

factor is priced in the broad cross‐section of futures returns, while controlling for various (non)tradeable factors.

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The findings suggest that an efficient risk transfer mechanism from hedgers to speculators is at play not only in

commodity futures markets but also in currency and equity futures markets. The long‐short portfolio analysis reveals

that speculators in these markets earn statistically significant mean excess returns that range from 2.51% to 4.12% per

annum as a reward for providing price risk insurance to hedgers. The cross‐sectional pricing analysis reveals that the

speculative pressure risk factors constructed either, individually, within each commodity, currency, and equity index

futures market or jointly across markets (“everywhere”speculative pressure factor) can explain the broad cross‐section

of futures returns across classes after controlling for the corresponding class‐specific or “everywhere”tradeable

momentum, value and carry factors, and nontradeable macroeconomic, global liquidity, and volatility risks. The

findings are not driven by transaction costs or illiquidity and remain robust also to the consideration of alternative

speculative pressure signals, portfolio construction techniques, ranking and holding periods, and subperiods. In sharp

contrast, we find no evidence of a significant speculative pressure premium in the interest rate and fixed income futures

markets. Thus, albeit from the lens of different research questions, our paper reaffirms Bessembinder (1992) and

Moskowitz, Ooi, and Pedersen (2012) in establishing that fixed income futures markets behave differently from other

futures markets as regards the information content of the net positions of hedgers or speculators.

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A hedgers‐to‐

speculators risk transfer in fixed income futures markets would be obscured if agents choose to hedge their interest rate

risk with other strategies (i.e., immunization, temporary change in modified duration).

The article contributes to the literature in three ways. First, to our knowledge, it provides the first empirical investigation

of the ability of tradeable long‐short portfolios based on speculative pressure to capture premia in futures markets on

instruments beyond commodities. In so doing, we add to Bessembinder (1992) and de Roon, Nijman, and Veld (2000) who

also study the pricing of hedging or speculative pressure in various futures markets. However, unlike us, they do not assess

the extent to which it is possible to capture a premium through long‐short speculative pressure portfolios.

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This portfolio

analysis facilitates fresh evidence to inform an ongoing debate on whether hedging pressure and its corollary, speculative

pressure, matter to the pricing of commodity futures.

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It also allows us to go a step further by addressing for the first time

the same question via a long‐short portfolio analysis for three distinct cross‐sections of financial futures contracts.

Second, by investigating the cross‐market performance of speculative pressure portfolios across classes of futures

contracts, we contribute to an “everywhere”pricing literature that has so far focused on the momentum, value and

carry factors.

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In this line of research, our study is the first to seek to identify the presence of common driving factors

behind the cross‐class speculative pressure premia. Thus, our empirical analysis informs not only the literature on asset

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In our paper, the term “everywhere”is used to refer to diverse classes of futures contracts. Investigating the issue of whether the “everywhere”speculative pressure premium constructed from futures

data can price the cross‐section of stocks or bonds goes beyond the scope of this paper.

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Bessembinder (1992) finds that residual risk conditioned on net hedging or speculative positions has strong cross‐sectional explanatory power for agricultural and currency futures returns, while

Moskowitz et al. (2012) document a relatively weak nexus between net speculative positions and time‐series momentum in fixed income futures markets. In a different vein, the carry study across

futures markets in Koijen et al. (2018) also documents weaker results for fixed income instruments.

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Another difference pertains to the sample. On the one hand, the broad cross‐section of futures markets that we examine (

N

=8

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), compared to the 22 contracts in Bessembinder (1992) and 20

contracts in de Roon et al. (2000), should enable firmer evidence on the hedging pressure hypothesis. In contrast, the time span from 1993 until 2018 includes recent important landmarks that should

enable more up‐to‐date tests.

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Apositive relation between the net short (long) positions of hedgers (speculators) and commodity futures returns has been documented by Cootner (1960, 1967), Chang (1985), Hirshleifer (1988,

1989), Bessembinder (1992), de Roon et al. (2000), Dewally, Ederington, and Fernando (2013), and Basu and Miffre (2013), whereas in sharp contrast, Rouwenhorst and Tang (2012), Gorton, Hayashi,

and Rouwenhorst (2013), Daskalaki, Kostakis, and Skiadopoulos (2014), and Szymanowska, de Roon, Nijman, and Van Den Goorbergh (2014) find no evidence of a significant relation.

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The so‐called “everywhere”literature suggests that a given asset characteristic has time‐series and/or cross‐sectional pricing ability across asset classes; for example, the momentum and value as

documented in Asness et al. (2013), and the carry or basis established by Koijen et al. (2018).

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