Term premiums and the integration of the eurocurrency markets

This paper provides comparative evidence on the time variation of expected returns across the term of Eurocurrency markets. First, it is shown that forward-spot spreads contain substanial information about future changed in 1-month to 5-year rates, both in the Eurodollar and EuroDM markets. Next, a latent variable model is constructed with different benchmark portfolios across currencies. Integration implies that the time variation of the benchmark portfolios must be the same across currencies. Little evidence is found against integration of the Eurocurrency markets. (JEL G15, G12).