Hedgers, speculators and forward markets: Evidence from currency markets

: Since Keynes (1930) and Hicks (1939) propounded their theory of normal backwardation, the issue of whether hedgers must pay speculators an insurance premium has remained controversial. Recent theoretical developments incorporating the existence of market imperfections have validated the existence of an insurance premium charged to hedgers by speculators. Owing to differences in data sets and econometric methods, a consensus has not yet been reached. Drawing inspiration from asset pricing theory a model of currency returns is used, similar to that in Mark (1988) and the importance of speculative influences is tested. The purpose of the paper is to highlight the theoretical and statistical deficiencies of the extant literature and to examine the robustness of previous empirical results to changes in specification. Applications to risk management and forecasting are immediate, as knowledge of any insurance premium is crucial in formulating an optimal hedging strategy and an optimal fore...

• Type: Journal
• Year: 2006
• Where: ENVSOFT
• Authors: K. F. Radalj
• Keywords: Asset Pricing Theory, ENVSOFT 2006, Insurance Premium, Speculators