The Forward Premium Puzzle and Latent Factors Day by Day

Casper de Vries, Juergen von Hagen and Kerstin Bernoth ()

No 7772, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 coefficient is positive, but it turns 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-specific and a time-to-maturity effect. Once we do this, we find 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.

Keywords: Forward premium puzzle; Futures rates; Latent factor (search for similar items in EconPapers)
JEL-codes: F31 F37 G13 (search for similar items in EconPapers)
Date: 2010-04
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: The forward premium puzzle and latent factors day by day (2012)
Working Paper: The Forward Premium Puzzle and Latent Factors Day by Day (2010)
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