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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)

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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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Publisher 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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Related research
Keywords: risk premia; foreign exchange;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing

References listed on IDEAS
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Patricia Fraser, Andrew J. McKaig, 2001. "Basis variation and a common source of risk: evidence from UK futures markets," European Journal of Finance, Taylor and Francis Journals, vol. 7(1), pages 39-62, March. [Downloadable!] (restricted)
  2. Michael D. McKenzie, Heather Mitchell, Robert D. Brooks, Robert W. Faff, 2001. "Power ARCH modelling of commodity futures data on the London Metal Exchange," European Journal of Finance, Taylor and Francis Journals, vol. 7(1), pages 22-38, March. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!]
  4. 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). [Downloadable!]
    Other versions:
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