• Traders' Concentration, Hedging Pressure, and Risk Premium in Futures Markets

Abstract

Purpose – This study explores the relationship between market concentration and risk premiums in the U.S. futures markets from 2010 to 2018. When studying the determinants of risk premiums in futures markets, existing literature focuses mainly on the risk-averse behavior of hedgers.

Design/methodology/approach – This study provides a new measure of market concentration, which measures the amount of information content held by traders in futures markets.

Findings – 1. Market concentration and hedging pressure coexist in explaining the determinants of risk premiums in various futures markets. 2. Market concentration and hedging pressures have no short-term impact on futures risk premiums. As the holding period increases, the impact of market concentration and hedging pressures on futures risk premiums will increase.

Research limitations/implications – Market concentration does not distinguish between commercial and non-commercial traders, so the largest traders may be classified as either commercial or non-commercial traders.

Practical implications/Social implications – Market concentration provides an alternative measure of risk premiums in the futures markets. For some futures products that cannot be explained by hedging pressure, changes in risk premiums can be predicted through market concentration.

Originality/value – This study will provide a lot of practical help for market investors who set up investment strategies and policymakers who establish trading rules to prevent market manipulation, thereby helping establish a more efficient and fair trading environment in futures markets.

Keywords –  Futures, Concentration, Risk premium, Hedging pressure