Can skewness of the futures‐spot basis predict currency spot returns?

Xue Jiang, Liyan Han and Libo Yin ()

Journal of Futures Markets, 2019, vol. 39, issue 11, 1435-1449

Abstract: This paper examines the relationship between skewness of the futures‐spot basis and expected currency spot returns. The empirical results show that the expected spot returns are negatively correlated with the basis skewness. We find that the basis skewness exhibits statistically significant in‐sample and out‐of‐sample forecasting power. Furthermore, the basis skewness beat the random walk (without drift) in economic measures. The impacts of the basis skewness on spot returns barely vary with time and have no structural breaks. We also find that the basis skewness can really improve the predictability of spot returns, even when the futures‐spot basis is considered.

Date: 2019
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