Premium
Can skewness of the futures‐spot basis predict currency spot returns?
Author(s) -
Jiang Xue,
Han Liyan,
Yin Libo
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21991
Subject(s) - skewness , futures contract , spot contract , predictability , econometrics , basis (linear algebra) , economics , spot market , currency , financial economics , statistics , mathematics , electricity , monetary economics , engineering , geometry , electrical engineering
This paper examines the relationship between skewness of the futures‐spot basis and expected currency spot returns. The empirical results show that the expected spot returns are negatively correlated with the basis skewness. We find that the basis skewness exhibits statistically significant in‐sample and out‐of‐sample forecasting power. Furthermore, the basis skewness beat the random walk (without drift) in economic measures. The impacts of the basis skewness on spot returns barely vary with time and have no structural breaks. We also find that the basis skewness can really improve the predictability of spot returns, even when the futures‐spot basis is considered.