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The Term Structure of Currency Futures' Risk Premia

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  • Bernoth, Kerstin
  • von Hagen, Jürgen
  • de Vries, Caspar

Abstract

The use of futures instead of forwards exchange contracts completes the ma-turity spectrum of the correlation between spot yields and the premium. Wefind that the forward premium puzzle appears to be a precrisis phenomenonand is only observed for maturities longer than about 1 month. Differencesin the exposure to risk help to explain cross-sectional spreads in currency ex-cess returns. However, this only applies for medium and longer maturities.Considering that most studies that test the validity of a risk-based approachto currency excess returns focus on short maturity securities, this explainswhy this approach is so often rejected.

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  • Bernoth, Kerstin & von Hagen, Jürgen & de Vries, Caspar, 2022. "The Term Structure of Currency Futures' Risk Premia," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 54(1), pages 5-38.
    • Handle: RePEc:zbw:espost:264447
    DOI: 10.1111/jmcb.12872
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    More about this item

    Keywords

    forward premium puzzle; uncovered interest parity; futures rates; price of risk; currency excess returns; capital asset pricing mode;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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