We present a simple model implying that futures risk premia depend on both ownmarket and cross-market hedging pressures. Empirical evidence from 20 futures markets, divided into four groups~financial, agricultural, mineral, and currency! indicates that, after controlling for systematic risk, both the futures own hedging pressure and cross-hedging pressures from within the group significantly affect futures returns. These effects remain significant after controlling for a measure of price pressure. Finally, we show that hedging pressure also contains explanatory power for returns on the underlying asset, as predicted by the model.

We use a simple model in which the expected returns in emerging markets depend on their systematic risk as measured by their beta relative to the world portfolio as well as on the level of integration in that market. The level of integration is a time-varying variable that depends on the market value of the assets that can be held by domestic investors only versus the market value of the assets that can be traded freely. Our empirical analysis for 30 emerging markets shows that there are strong e¤ects of the level of integration or segmentation on the expected returns in emerging markets. The expected returns depend both on the level of segmentation of the emerging market itself and on the regional segmentation level. We also …nd that there is signi…cant time-variation in the betas relative to the world portfolio because of the level of segmentation. For the composite index of the emerging markets we …nd an annual increase in beta of 0.09 due to decreased segmentation of the emerging markets in our sample period. In terms of expected returns the total e¤ect on the composite index translates into an average decrease of 4.5 percent per annum. As predicted by our model, the noninvestable assets are more sensitive to the local and less to the regional level of segmentation than the investable assets. These conclusions do not change when using additional control variables. We do not …nd a clear pattern between volatility and segmentation, however.

We propose regression-based tests for mean-variance spanning in the case where investors face market frictions such as short sales constraints and transaction costs. We test whether U.S. investors can extend their efficient set by investing in emerging markets when accounting for such frictions. For the period after the major liberalizations in the emerging markets, we find strong evidence for diversification benefits when market frictions are excluded, but this evidence disappears when investors face short sales constraints or small transaction costs. Although simulations suggest that there is a possible small-sample bias, this bias appears to be too small to affect our conclusions.

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