The Japanese yen futures returns, spot returns, and the risk premium

Japanese yen currency dynamics are investigated in spot and futures markets. Maturity is proposed as a proxy for the time-varying risk premium. As the maturity of a yen futures contract nears, there is less uncertainty implying a small absolute risk premium. A longer maturity is associated with uncertainty about the economy, the underlying currency, and the contract; and implies a high risk premium. Models that include maturity in addition to the futures-spot basis as explanatory variables exhibit better empirical performance in explaining futures returns and spot returns. The results are robust to different sample periods, forecast horizons, and estimation techniques.