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The forward premium puzzle and latent factors day by day

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

Abstract

We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities the slope coeffcient is positive, but these turn negative as the maturity increases to the monthly level. Futures data allow us to control for the influence of an unobserved factor that can be decomposed into a contract-speci fic and a time-to-maturity e ffect. Once we do this, we nd that the coefficients on the forward premium are much closer to one. The latent factor is shown to be related to conventional proxies of risk.

Suggested Citation

  • Bernoth, Kerstin & von Hagen, Jürgen & de Vries, Casper, 2012. "The forward premium puzzle and latent factors day by day," VfS Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62017, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc12:62017
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    Cited by:

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    2. Virginie Coudert & Cyriac Guillaumin & Hélène Raymond, 2014. "Looking at the other side of carry trades: Are there any safe haven currencies?," EconomiX Working Papers 2014-13, University of Paris Nanterre, EconomiX.
    3. Tamgac, Unay, 2013. "Duration of fixed exchange rate regimes in emerging economies," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 439-467.

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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
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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