Estimating a Latent Risk Premium in Exchange Rate Futures

Discussion Papers 1733, 43 S.

Kerstin Bernoth, Jürgen von Hagen, Casper G. de Vries

2018

get_appDownload (PDF  1.76 MB)

Abstract

Using exchange rates futures instead of forwards completes the maturity spectrum of the correlation between the spot return and the premium. The correlation decreases with increasing maturity, presumably due to a latent risk premium. We hypothesize that the influence of the unobserved risk factor has a contract-specific risk component. Our main contribution is to control for the omitted variable bias by using a modified version of the CCE panel estimator in combination with futures data. This renders the coefficient on the futures premium insignificantly different from one. Subsequently, the contract-specific part is related to conventional proxies of risk.

Kerstin Bernoth

Stellvertretende Abteilungsleiterin in der Abteilung Makroökonomie

Themen: Finanzmärkte



JEL-Classification: F31;F37;G13
Keywords: Forward premium puzzle, CCE estimation, futures rates, latent risk
Frei zugängliche Version: (econstor)
http://hdl.handle.net/10419/178995