Currency Futures' Risk Premia and Risk Factors

43 Pages Posted: 4 May 2020

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Jürgen von Hagen

University of Bonn

Casper de Vries

Erasmus University Rotterdam (EUR); Tinbergen Institute

Date Written: April 2020


The use of futures exchange contracts instead of forwards completes the maturity spectrum of the correlation between the spot yield and the premium. We find that the forward premium puzzle (FFP) depends significantly on the maturity horizon of the futures contract and the choice of sampling period. The FFP appears to be a pre-crisis phenomenon and is only observed for maturities longer than about one month. When examining whether the observed excess returns of futures contracts represent a fair compensation for currency risk, we find that non-durable consumption risk and market risk can explain excess currency returns. But only in the pre-crisis period and when the maturity of the assets is longer than about three months.

Keywords: Forward premium puzzle, uncovered interest parity, futures rates, risk premium, currency excess returns, capital asset pricing model

JEL Classification: F31,F37,G12,G13,G15

Suggested Citation

Bernoth, Kerstin and Hagen, Jürgen von and de Vries, Casper, Currency Futures' Risk Premia and Risk Factors (April 2020). DIW Berlin Discussion Paper No. 1866, Available at SSRN: or

Kerstin Bernoth (Contact Author)

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

Mohrenstraße 58
Berlin, 10117

Jürgen von Hagen

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012

Casper De Vries

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA

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