Bernoth, Kerstin von Hagen, Jürgen de Vries, Casper
Year of Publication:
Beiträge zur Jahrestagung des Vereins für Socialpolitik 2012: Neue Wege und Herausforderungen für den Arbeitsmarkt des 21. Jahrhunderts - Session: Exchange Rates E16-V1
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 coeffcient 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-speci fic and a time-to-maturity e ffect. Once we do this, we nd 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.