Working Paper: NBER ID: w1743
Authors: Robert J. Hodrick; Sanjay Srivastava
Abstract: The theoretical nature of risk premiums in foreign currency futures markets is derived and studied empirically. Estimation problems encountered in using futures data are discussed. Since forward rates and futures prices are demonstrated to be approximately equal, and because risk premiums in forward markets are highly variable, consistency of the data requires time variation in daily risk premiums in the futures market. Unbiasedness of daily futures prices as predictors of the following day's futures price is rejected for all currencies. Reconciliation of daily and monthly data requires positive serial correlation in daily risk premiums.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unbiasedness hypothesis rejected (C12) | futures prices do not predict future spot prices (G13) |
| risk premium variability (G19) | predictability of futures prices (G13) |
| rejection of unbiasedness hypothesis (C46) | consistent causal relationship across markets (C10) |
| time variation of risk premiums (G19) | dynamics of foreign currency futures pricing (F31) |
| risk premiums (G19) | futures prices (G13) |
| fluctuations in risk premiums (G19) | futures prices (G13) |