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The Term Structure of Currency Futures' Risk Premia

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  • KERSTIN BERNOTH
  • JÜRGEN VON HAGEN
  • CASPER DE VRIES

Abstract

The use of futures instead of forwards exchange contracts completes the maturity spectrum of the correlation between spot yields and the premium. We find that the forward premium puzzle appears to be a precrisis phenomenon and is only observed for maturities longer than about 1 month. Differences in the exposure to risk help to explain cross‐sectional spreads in currency excess returns. However, this only applies for medium and longer maturities. Considering that most studies that test the validity of a risk‐based approach to currency excess returns focus on short maturity securities, this explains why this approach is so often rejected.

Suggested Citation

  • Kerstin Bernoth & Jürgen Von Hagen & Casper De Vries, 2022. "The Term Structure of Currency Futures' Risk Premia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(1), pages 5-38, February.
  • Handle: RePEc:wly:jmoncb:v:54:y:2022:i:1:p:5-38
    DOI: 10.1111/jmcb.12872
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    More about this item

    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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