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Time-Varying Risk Premia in the Foreign Currency Futures Basis

  • John Barkoulas

    ()

    (Boston College)

  • Christopher F. Baum

    ()

    (Boston College)

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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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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