The Conditional Price of Basis Risk: An Investigation Using Foreign Exchange Instruments

26 Pages Posted: 23 Sep 2004

See all articles by Joëlle Miffre

Joëlle Miffre

Audencia Nantes School of Management; Audencia Business School

Abstract

This paper uses a conditional multifactor model and shows that the basis of foreign currency instruments includes a time-varying risk premium that is related to the conditional risk of the basis and to the conditional prices of systematic risk present in all assets markets. The result therefore reinforces the view, initially put forward by Bailey and Chan (1993), that the basis is priced rationally in an efficient market. The article also shows that the premium for basis risk increases with the maturity of the instruments used for hedging.

JEL Classification: G10

Suggested Citation

Miffre, Joelle, The Conditional Price of Basis Risk: An Investigation Using Foreign Exchange Instruments. Journal of Business Finance & Accounting, Vol. 31, No. 7-8, pp. 1043-1068, September 2004. Available at SSRN: https://ssrn.com/abstract=591498

Joelle Miffre (Contact Author)

Audencia Nantes School of Management ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

Audencia Business School ( email )

8 Road Joneliere
BP 31222
Nantes Cedex 3, 44312
France

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