The Forward Premium Puzzle and Latent Factors Day by Day

40 Pages Posted: 4 Jul 2010

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Jürgen von Hagen

University of Bonn

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

Multiple version iconThere are 3 versions of this paper

Date Written: March 2010

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.

Keywords: forward premium puzzle, futures rates, latent factor

JEL Classification: F31, F37, G13

Suggested Citation

Bernoth, Kerstin and Hagen, Jürgen von and De Vries, Casper, The Forward Premium Puzzle and Latent Factors Day by Day (March 2010). DIW Berlin Discussion Paper No. 989, Available at SSRN: https://ssrn.com/abstract=1633868 or http://dx.doi.org/10.2139/ssrn.1633868

Kerstin Bernoth (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

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Jürgen von Hagen

University of Bonn ( email )

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Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

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