Daily Trading and Efficiency in Futures Markets

Review of Futures Markets, Vol. 16, No. 2, pp. 215-240, 2007

Posted: 27 Aug 2007 Last revised: 8 Dec 2009

Abstract

This study examines short horizon currency futures returns. Expectations hypothesis or risk neutrality assumes an efficient market with no risk premium, and therefore no predictor for futures returns. Using the British, German, Swiss, Japanese, and Canadian currencies as well as pooled currency data, we document that in the 1980s the futures-spot basis was a proxy for the risk premium and did have predictive power over futures returns. However, in the 1990s, various efficiency enhancing mechanisms have reduced the risk premium and eliminated the forecasting power of the basis. Conclusions are similar and even more pronounced for longer maturity currency futures contracts where the risk premium was more dominant in the 1980s.

Keywords: Foreign exchange, Futures returns, Market efficiency

JEL Classification: F31, G13, G12, G15

Suggested Citation

Inci, Ahmet Can, Daily Trading and Efficiency in Futures Markets. Review of Futures Markets, Vol. 16, No. 2, pp. 215-240, 2007, Available at SSRN: https://ssrn.com/abstract=1009510

Ahmet Can Inci (Contact Author)

Bryant University ( email )

1150 Douglas Pike
Smithfield, RI 02917
United States

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