Kerstin Bernoth, Jürgen von Hagen, Casper G. de Vries
Futures instead of forwards are used to study the complete maturity spectrum of the correlations between the spot returns and premium from two days up to six months. The correlation decreases with increasing maturity. We hypothesize this maturity effect is part of a latent factor. Futures data allow us to control for the influence of an unobserved factor that can be decomposed into this time-to-maturity effect and contract-specific risk drivers. Doing this, we find that the coeffcient on the forward premium is significantly positive. The contract-specific part is shown to be related to conventional proxies of risk.
JEL-Classification: F31;F37;G13
Keywords: forward premium puzzle, futures rates, latent factor
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