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Unbiasedness Hypothesis

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Int. Fin. Markets, Inst. and Money 29 (2014) 13–32

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Journal of International Financial Markets, Institutions & Money j o ur na l ho me pa ge : w w w . e l s e v i e r . c o m / l o c a t e / i n t f i n

Unbiasedness and risk premiums in the Indian currency futures market
Satish Kumar a, Stefan Trück b,∗ a b

IBS Hyderabad (a Constituent of ICFAI Foundation for Higher Education), India Macquarie University, Sydney, Australia

a r t i c l e

i n f o

a b s t r a c t
This paper explores the relationship between currency futures and realised spot rates for the Indian rupee US dollar exchange rate. Using futures contracts with maturities of one, two and three months, we examine the unbiasedness of futures quotes as a predictor of the future spot exchange rate as well as the nature of time-varying risk premiums in this emerging market. Empirical estimates, obtained using monthly data, suggest the biasedness of futures quotes as a predictor of the future spot rate for contracts with maturities of two and three months. We also find significant time-varying risk premiums in the considered futures market, while the premium is of greater magnitude and more significant with increasing maturity of the contracts. We then examine the relationship between realised risk premiums and explanatory variables such as spot currency returns, the futures basis and realised volatility, skewness and kurtosis of spot currency returns. Our results show that spot currency returns and the futures basis can be considered as significant determinants of realised risk premiums in the considered futures market. © 2013 Elsevier B.V. All rights reserved.

Article history: Received 16 May 2012 Accepted 28 October 2013 Available online 14 November 2013 JEL classification: F31 G15 G13 Keywords: Currency futures markets Risk premiums Unbiasedness

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