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In search of the convexity adjustment: Evidence from the sterling futures and IMM FRA markets

✍ Scribed by Russell Poskitt

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
174 KB
Volume
28
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

This study examines daily and intraday data on sterling interest rate futures and IMM forward rate agreement (FRA) contracts for evidence of the convexity adjustment in FRA quotes. The futures/FRA differential is marginally negative, contrary to the predictions of convexity models. Standard statistical tests confirm that the futures/FRA differential does not differ between contract maturities. Regression analysis also fails to find any support for the predicted positive relationships between the differential and the term to settlement and volatility of interest rates. These results suggest that dealers in the sterling FRA market do not price convexity into quotes on FRA contracts. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:617–633, 2008

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