n recent years there has been a proliferation of futures markets for financial I assets. The most successful of these have been the Treasury Bill and Treasury Bond futures markets. While the growth of these markets has generated a large body of literature surrounding T-Bill market efficiency,' little research has been conducted with regard to the efficiency of the T-Bond futures market. The only published study that has estimated the efficiency of the T-Bond futures market both within and outside of the delivery month was conducted by Resnick and Hennigar
( 1983). They concluded that the market was quite efficient when short-term rates were low and somewhat overpriced when short-term rates were high.
Their results, however, are inconclusive on several grounds. First, Resnick and Hennigar may have underestimated potential inefficiencies by reporting net mean daily returns of positive as well as negative arbitrage profits, since a negative arbitrage need not be realized in practice. Second, the inclusion of borrowing costs in excess of the T-Bill rate was mentioned as a possible reason for the overpricing but was not specifically analyzed. Third, they made no adjustment for the reinvestment rate risk associated with the return of a coupon payment made to the arbitrageur over the holding period. Finally, little mention was made of the effects of futures market resettlement or taxes.' 'These include articles by Poole (1978). Rendleman and Carabini (19791. Capozza and Cornell (1979). Dale end Vignola (1979). Chow and Brophy (1978, 1982). Arak (1980). and others. The general conclusion of these studies is that the T-Bill cash and futures markets are efficient with respect to basic arbitrage strategies.
T h e resettlement feature of future markets works in the following manner. After each trading day for any given change in the future price, the side for whose favor the price change occurred must be paid the full amount of the change by ihe losing party. Therefore, the actual payment at delivery date is \he price of h e contract at that time. This is unlike forward contracts where the only settlement made is at delivery date.