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Unbiasedness and risk premiums in the Indian currency futures market

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  • Kumar, Satish
  • Trück, Stefan

Abstract

This paper explores the relationship between currency futures and realised spot rates for the Indian rupee US dollar exchange rate. Using futures contracts with maturities of one, two and three months, we examine the unbiasedness of futures quotes as a predictor of the future spot exchange rate as well as the nature of time-varying risk premiums in this emerging market. Empirical estimates, obtained using monthly data, suggest the biasedness of futures quotes as a predictor of the future spot rate for contracts with maturities of two and three months. We also find significant time-varying risk premiums in the considered futures market, while the premium is of greater magnitude and more significant with increasing maturity of the contracts. We then examine the relationship between realised risk premiums and explanatory variables such as spot currency returns, the futures basis and realised volatility, skewness and kurtosis of spot currency returns. Our results show that spot currency returns and the futures basis can be considered as significant determinants of realised risk premiums in the considered futures market.

Suggested Citation

  • Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.
    • Handle: RePEc:eee:intfin:v:29:y:2014:i:c:p:13-32
    DOI: 10.1016/j.intfin.2013.10.010
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    2. Xue Jiang & Liyan Han & Libo Yin, 2019. "Can skewness of the futures‐spot basis predict currency spot returns?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(11), pages 1435-1449, November.
    3. Stefan Trück & Rafał Weron, 2016. "Convenience Yields and Risk Premiums in the EU‐ETS—Evidence from the Kyoto Commitment Period," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 587-611, June.
    4. Miah, Fazlul & Altiti, Omar, 2020. "Risk premium or irrational expectations? An investigation into the causes of forward discount bias across 27 developed and developing economies forward rates," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
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    6. Kumar, Satish, 2019. "Does risk premium help uncover the uncovered interest parity failure?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Currency futures markets; Risk premiums; Unbiasedness; Realised volatility;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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