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Risk premiums and predictive ability of BAX futures

Authors

  • Nikolay Gospodinov,

    1. Department of Economics, Concordia University, Montreal, QC, Canada and a Research Fellow at CIREQ
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  • Ibrahim Jamali

    Corresponding author
    1. Department of Finance, Accounting and Managerial Economics, Olayan School of Business, American University of Beirut, Beirut, Lebanon
    • Department of Finance, Accounting and Managerial Economics, Olayan School of Business, American University of Beirut, Beirut 1107 2020, P. O. Box 11-0236, Riad El-Solh Street, Lebanon
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  • We thank the Editor and an anonymous referee for numerous helpful comments and suggestions.

Abstract

This study provides an in-depth analysis of risk premiums in the Canadian Bankers' Acceptances futures (BAX) market. The predictive regressions for excess and holding-period returns on BAX futures lend empirical support to the presence of time-varying risk premiums especially at longer horizons. Despite the evidence of time variation in the risk premium, however, the unbiasedness of the basis as a predictor of spot returns in forecast efficiency regressions cannot be rejected. The out-of-sample forecasts of spot returns demonstrate the excellent predictive ability of models that exploit the restrictions implied by the unbiasedness hypothesis. Overall, our findings support the presence of a slowly moving risk premium and entail important practical implications for measuring monetary policy expectations and portfolio allocation. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark

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