Working Paper: CEPR ID: DP7772
Authors: Kerstin Bernoth; Jürgen von Hagen; Casper G. de Vries
Abstract: We use futures instead of forward rates to study the complete maturity spectrum of the forward premium puzzle from two days to six months. At short maturities, the slope coefficient is positive, but it turns negative as the maturity increases to the monthly level. Futures data allow us to control for the influence of an unobserved factor that can be decomposed into a contract-specific and a time-to-maturity effect. Once we do this, we find that the coefficients on the forward premium are much closer to one. The latent factor is shown to be related to conventional proxies of risk.
Keywords: forward premium puzzle; futures rates; latent factor
JEL Codes: F31; F37; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| time to maturity (C41) | slope coefficient in Fama regression (C29) |
| slope coefficient in Fama regression (C29) | forward premium puzzle (F31) |
| futures premium (G13) | realized returns (G19) |
| latent factor (C51) | futures premium (G13) |
| latent factor (C51) | realized returns (G19) |