Currency Futures' Risk Premia and Risk Factors

Kerstin Bernoth (kbernoth@diw.de), Juergen von Hagen and Casper de Vries

No 1866, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: The use of futures exchange contracts instead of forwards completes the maturity spectrum of the correlation between the spot yield and the premium. We find that the forward premium puzzle (FFP) depends significantly on the maturity horizon of the futures contract and the choice of sampling period. The FFP appears to be a pre-crisis phenomenon and is only observed for maturities longer than about one month. When examining whether the observed excess returns of futures contracts represent a fair compensation for currency risk, we find that non-durable consumption risk and market risk can explain excess currency returns. But only in the pre-crisis period and when the maturity of the assets is longer than about three months.

Keywords: Forward premium puzzle; uncovered interest parity; futures rates; risk premium; currency excess returns; capital asset pricing model (search for similar items in EconPapers)
JEL-codes: F31 F37 G12 G13 G15 (search for similar items in EconPapers)
Pages: 40 p.
Date: 2020
New Economics Papers: this item is included in nep-ifn, nep-opm and nep-upt
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