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Title:The forward premium puzzle and latent factors day by day PDF Logo
Authors:Bernoth, Kerstin
von Hagen, Jürgen
de Vries, Casper G.
Issue Date:2010
Series/Report no.:Discussion papers // German Institute for Economic Research 989
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 these turn 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.
Subjects:Forward premium puzzle
futures rates
latent factor
Document Type:Working Paper
Appears in Collections:DIW-Diskussionspapiere
Publikationen von Forscherinnen und Forschern des DIW

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