The Japanese yen futures returns, spot returns, and the risk premium ☆ Ahmet Can Inci ⁎ College of Business — Department of Finance, Florida State University, Tallahassee, FL 32306-1110, United States Faculty of Management, Sabanci University, Orhanli Tuzla 34956, Istanbul, Turkey Received 25 February 2006; received in revised form 8 November 2006; accepted 14 February 2007 Available online 14 September 2007 Abstract 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. © 2007 Elsevier Inc. All rights reserved. JEL classification: F31; G15 Keywords: Exchange rates; Futures markets; Risk premium; Uncovered interest parity 1. Introduction The Japanese foreign exchange market has seen an extraordinary growth after its liberalization in the 1980s and has become the second largest market in the world. The Japanese yen derivatives trading has a much greater volume than other currencies. There is also an increasing debate about Available online at www.sciencedirect.com Global Finance Journal 18 (2008) 385 – 399 ☆ I thank David Humphrey, James Ang, Nejat Seyhun, Josh Coval, Donald Nast, Kalok Chan, Florida State University finance workshop participants, and especially Manuchehr Shahrokhi and two anonymous referees for their valuable comments and suggestions. ⁎ Faculty of Management, Sabanci University, Orhanli Tuzla 34956,Istanbul, Turkey. Tel.: +90 216 325 2576. E-mail address: ainci@cob.fsu.edu. 1044-0283/$ - see front matter © 2007 Elsevier Inc. All rights reserved. doi:10.1016/j.gfj.2007.02.002