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Time-Varying Risk Premia in the Foreign Currency Futures Basis

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Author Info

  • John Barkoulas

    ()
    (Boston College)

  • Christopher F. Baum

    ()
    (Boston College)

Abstract

Significant time-varying risk premia exist in the foreign currency futures basis, and these risk premia are meaningfully correlated with common macroeconomic risk factors from equity and bond markets. The stock index dividend yield and the bond default and term spreads in the U.S. markets help forecast the risk premium component of the foreign currency futures basis. The specific source of risk matters, but the relationships are robust across currencies. The currency futures basis is positively associated with the dividend yield and negatively associated with the spread variables. These correlations cannot be attributed to the expected spot price change component of the currency futures basis, thus establishing the presence of a time-varying risk premium component in the currency futures basis.

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File URL: http://fmwww.bc.edu/EC-P/wp281.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 281..

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Length: 28 pages
Date of creation: Jan 1996
Date of revision:
Publication status: published, Journal of Futures Markets 16:7, 735-755.
Handle: RePEc:boc:bocoec:281

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Keywords: risk premia; foreign exchange;

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References

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Citations

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Cited by:
  1. Joshua V. Rosenberg & Leah G. Traub, 2006. "Price discovery in the foreign currency futures and spot market," Staff Reports 262, Federal Reserve Bank of New York.
  2. Patricia Fraser & Andrew McKaig, 2001. "Basis variation and a common source of risk: evidence from UK futures markets," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 39-62.
  3. McKenzie, Andrew M. & Holt, Matthew T., 1998. "Market Efficiency In Agricultural Futures Markets," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20933, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  4. McKenzie, M. & Michell, H. & Brooks, R.D. & Faff, R.W., 1998. "Power ARCH Modelling of Commodity Futures Data on the London Metal Exchange," Papers 98-3, Melbourne - Centre in Finance.
  5. Sadorsky, Perry, 2002. "Time-varying risk premiums in petroleum futures prices," Energy Economics, Elsevier, vol. 24(6), pages 539-556, November.
  6. Vít Pošta, 2012. "Estimation of the Time-Varying Risk Premium in the Czech Foreign Exchange Market," Prague Economic Papers, University of Economics, Prague, vol. 2012(1), pages 3-17.
  7. Vít Pošta, 2009. "The Role of fundamentals factors of empirical analysis of the Prague stock exchange," Ekonomika a Management, University of Economics, Prague, vol. 2009(3).
  8. 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.

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