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I thank Paul Newbold, William Maloney and Jose Saul Lizondo for comments. The views expressed in this paper are those of the author only. The usual disclaimer applies.
Unless explicitly stated the variables will be expressed in terms of their natural logarithms.
Consider for example the November 1991 contract. To obtain the values for November, the difference between the October prices and the September prices for the November contract were taken keeping constant the forecasting horizon (one month or one week).
According to the definitions used so far, if futures prices have a rising trend, the risk premium is said to be negative (as if agents underpredicted futures prices) and those who are short in domestic currency, long in US$ are compensated for the risk they bear such as the risk that a stabilization will be attempted and the currency devaluation will be much lower than the inflation rate.
Figures in parentheses beneath coefficient estimates are the corresponding estimated standard errors, and se2 is the estimate of the error variance σe2.