Risk premiums and predictive ability of BAX futures |
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| Authors: | Nikolay Gospodinov Ibrahim Jamali |
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| Institution: | 1. Department of Economics, Concordia University, Montreal, QC, Canada and a Research Fellow at CIREQ;2. Department of Finance, Accounting and Managerial Economics, Olayan School of Business, American University of Beirut, Beirut, Lebanon |
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| 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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