Risk premia in futures markets: Price volatility, time-varying risk premia, and returns to speculators

This dissertation consists of three related essays on risk premia in futures markets. The first essay tests the existence of risk premia in futures markets. The tests are based on the returns to professional (or large) hedgers and speculators calculated from data on commodity futures prices and foreign currency futures prices, as well on traders' commitments on the futures trading. The empirical test results show that professional hedgers consistently lose money on the average, implying that they pay risk premia for the futures contracts. It is also found that the professional speculators consistently make profits on the average in the futures markets, attributable to risk-bearing rather than superior information.;The second essay examines the effect of the futures price volatility on the risk premium hedgers pay for the futures contract, since it has been argued that the more uncertain the futures price is the more risk premium hedgers pay. The model is tested by regressing the ex post risk premium the professional hedgers pay for the futures contract on the ex post variance of the futures price. Estimation of the model using the seemingly unrelated regression method indicates that there is a significantly positive relationship between the volatility of the futures price and the risk premium hedgers pay for every futures contract investigated.;Finally, the study examines whether the professional speculators receive time-varying risk premia in the framework of the Generalized Autoregressive Conditional Hetroskedasticity in Mean (GARCH-M) model. The return from holding the futures contract is regressed on the conditional variance of the return. The GARCH model fits well for every regression equation. The test results show that the professional speculators are risk averse and receive significant time-varying risk premia from holding the futures contracts.