Derivative-Market Leverage and Risk Premia Implications-Peking University HSBC Business School(PHBS)

Derivative-Market Leverage and Risk Premia Implications

2022-09-07 17:05:44

We use the futures commission merchants (FCM) reports released by CFTC to construct a frequent (monthly) and timely (one month delay) market leverage measure, based on the margin information of market participants. Empirically, high derivative-market leverage significantly predicts low (high) risk premia of risky (safety) assets, potentially as an effective indicator or the investors’ risk tolerance. This effect is robust across both futures and spot markets, persistent for about one year, and stronger during the deleveraging periods. Our leverage measure is responding to economic activities and market uncertainty but leading capital constrains. These results are consistent with a stylized model of futures trading market, with a slight modification of the risk tolerance assumption.

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