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Speculative Pressure

Last Updated on 10 February, 2024 by Rejaul Karim

The study “Speculative Pressure,” delves into an in-depth exploration of the information content inherent in speculative pressure across various futures classes.

Authored by John Hua Fan, Adrian Fernandez-Perez, Ana-Maria Fuertes, and Joëlle Miffre, the research uncovers the significant premium captured in commodity, currency, and equity markets through long-short portfolios of futures contracts sorted by speculative pressure.

Notably, exposure to speculative pressure in these markets is found to be priced in the broad cross-section after controlling for momentum, carry, global liquidity, and volatility risks.

The study’s robust findings, confirmed by alternative signals, portfolio construction techniques, and sub-periods, underscore an efficient risk transfer between hedgers and speculators within commodity, currency, and equity index futures markets.

Abstract Of Paper

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 sub-periods inter alia. We argue that there is an efficient hedgers-speculators risk transfer in commodity, currency and equity index futures markets.

Original paper – Download PDF

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Author

John Hua Fan
Griffith University – Department of Accounting, Finance and Economics

Adrian Fernandez-Perez
Auckland University of Technology

Ana-Maria Fuertes
Bayes Business School, City, University of London

Joëlle Miffre
Audencia Business School

Conclusion

In conclusion, the study on speculative pressure provides compelling evidence of its profound influence across futures markets, particularly in commodity, currency, and equity sectors.

The analysis demonstrates that long-short portfolios of futures contracts, categorized by speculative pressure, yield a significant premium, effectively capturing the attention of market participants.

Furthermore, the study confirms the influence of speculative pressure through pricing in the broad cross-section, even after accounting for various other market risks.

Robustness tests solidify these findings, reaffirming the efficient risk transfer between hedgers and speculators, particularly evident in commodity, currency, and equity index futures markets.

These insights not only contribute to a deeper understanding of market dynamics but also offer valuable implications for market pricing and risk assessment.

Related Reading:

The Rank Effect for Commodities

What Does Futures Market Interest Tell Us about the Macroeconomy and Asset Prices?

FAQ

Q1: What is the main focus of the study on “Speculative Pressure” by John Hua Fan, Adrian Fernandez-Perez, Ana-Maria Fuertes, and Joëlle Miffre?

A1: The main focus of the study is to explore the information content of speculative pressure across various futures classes, including commodities, currencies, equities, and fixed income. The research investigates the premium captured in commodity, currency, and equity markets through long-short portfolios of futures contracts sorted by speculative pressure.

Q2: What are the key findings regarding the influence of speculative pressure on futures markets, and how is this influence confirmed across different asset classes?

A2: The study finds that long-short portfolios of futures contracts, categorized by speculative pressure, capture a significant premium in commodity, currency, and equity markets. However, this premium is not observed in fixed income markets. The influence of speculative pressure is confirmed by demonstrating that exposure to commodity, currency, and equity index futures’ speculative pressure is priced in the broad cross-section after controlling for other market risks such as momentum, carry, global liquidity, and volatility.

Q3: How do the robustness tests contribute to the study’s findings on speculative pressure, and what is the significance of the efficient risk transfer mentioned in the conclusion?

A3: The robustness tests in the study involve alternative speculative pressure signals, portfolio construction techniques, and sub-period analyses. These tests strengthen and confirm the initial findings, providing additional credibility to the influence of speculative pressure. The conclusion highlights the efficient risk transfer between hedgers and speculators in commodity, currency, and equity index futures markets. This implies that these markets exhibit an effective mechanism for transferring risk between participants, enhancing the understanding of the dynamics and functioning of these futures markets.

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