Historical Exchange Rate Risk Premiums in Currency Futures Markets

Journal of Business & Economics Research, Vol. 1, pp. 1-20, 2003

Posted: 24 Jan 2006

Abstract

This paper examines the historical predictive power of future spot spread in estimating currency changes. Currency futures and spot rates over the last two decades are examined. Results show that as forecast horizon of currency depreciation increases, the slope coefficients become less positive, first losing their significance, and eventually for 1-month regressions, becoming negative for the British pound, Swiss franc and Japanese yen (significantly negative for the yen) indicating risk premiums differ with forecast horizon. On the other hand, expectations hypothesis is validated when the forecast horizon is 1 day. These results hold for each decade separately, as well as the total sample. Comparison of early (1980s) and recent (1990s) periods reveals expectations hypothesis is validated in the recent period. This indicates the trend towards a more efficient market. This should not be very surprising with the introduction of round the clock electronic trading medium and reduction of transaction fees in futures markets. This also implies that the absolute value of the risk premium has decreased over the last two decades. The extreme case of forward premium puzzle in one-month forecasts diminishes in the 1990s. The results are robust to partitioning the sample period into four sub samples and separating the data based on maturity of futures contracts.

Keywords: Currency, Futures Markets, Risk Premium

JEL Classification: F31, G13, G15

Suggested Citation

Inci, Ahmet Can, Historical Exchange Rate Risk Premiums in Currency Futures Markets. Journal of Business & Economics Research, Vol. 1, pp. 1-20, 2003, Available at SSRN: https://ssrn.com/abstract=877214

Ahmet Can Inci (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
978
PlumX Metrics