The Conditional Price of Basis Risk: An Investigation Using Foreign Exchange Instruments

Joëlle Miffre

Journal of Business Finance & Accounting, 2004, vol. 31, issue 7‐8, 1043-1068

Abstract: Abstract: This paper uses a conditional multifactor model and shows that the basis of foreign currency instruments includes a time‐varying risk premium that is related to the conditional risk of the basis and to the conditional prices of systematic risk present in all assets markets. The result therefore reinforces the view, initially put forward by Bailey and Chan (1993), that the basis is priced rationally in an efficient market. The article also shows that the premium for basis risk increases with the maturity of the instruments used for hedging.

Date: 2004
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