Hedging Pressure and Futures Price Movements in a General Equilibrium Model.

Futures hedging and pricing are examined in a model with two consumption goods, stochastic output, and sequential information arrival. Positive (negative) complementarity in consumer preferences promotes greater futures risk premia. The partial equilibrium conclusion that risk premia are a function of hedging pressure fails in the general equilibrium analysis with costless trading. As preferences are varied, producer hedging can change from long to short, while the futures risk premium remains unchanged. However, hedging pressure is reinstated as a determinant of risk premia, provided (as is usually valid) that fixed setup costs of trading deter consumers more than producers from participating in the futures market. Copyright 1990 by The Econometric Society.