Risk Premia in Foreign Currency Futures

Abstract

This paper tests the uncorrelatedness of increments of daily foreign currency futures prices and derives implications for risk premia based on a heteroscedasticity‐robust variance ratio test. There is evidence suggesting the existence of a time‐varying risk premia. Moreover, the results suggest that currency futures price is not an unbiased predictor of currency spot price on corresponding maturity date of currency futures contract. The paper also applies a heteroscedasticity‐adjusted Box‐Pierce Q test to the same data set for comparison.

Time‐varying jump risk premia in stock index futures returns

“…McCurdy and Morgan find strong evidence of time‐varying risk premium in foreign currency with a trivariate GARCH‐in‐mean model. Liu and He reach the same conclusion with a heteroskedasticity‐robust variance ratio test. The presence of time‐varying risk premium is also detected in commodity futures markets by Deaves and Krinsky and Chang, Chen, and Chen .…”

European foreign exchange market efficiency: Evidence based on crisis and noncrisis periods

“…However, the existence of a risk premium can make an efficient market appear to be inefficient. Liu and He (1992) and Hu (1997) find statistically significant evidence of a time-varying risk premium. Conversely, Pope and Peel (1991) and Ligeralde (1997) reject the existence of a risk premium.…”

Risk Premia in Foreign Currency Futures: A Reexamination

“…A recent paper in this journal by Liu and He [121 finds evidence of significant autocorrelations in five foreign currency futures returns by employing Lo and MacKinlay's [131 heteroskedasticity-consistent variance ratio tests. Liu and He attribute these significant results to time-varying risk premium while maintaining market efficiency.…”