Interest rate futures: Evidence on forecast power, expected premiums, and the unbiased expectations hypothesis
✍ Scribed by Tim Krehbiel; Lee C. Adkins
- Publisher
- John Wiley and Sons
- Year
- 1994
- Tongue
- English
- Weight
- 678 KB
- Volume
- 14
- Category
- Article
- ISSN
- 0270-7314
No coin nor oath required. For personal study only.
✦ Synopsis
Due to the convergence of the futures contract price to the spot price at delivery, it has been hypothesized that a component of the futures price is the expectation of the spot price on the delivery date. The extent to which a futures contract price reflects unbiased expectations of the spot price on the delivery date, or conversely the extent to which futures contract prices embody systematic expected premiums, affects the cost of using the futures contract in hedging activities.
This study examines the forecast power of interest rate futures contract prices and tests the unbiased expectations hypothesis in the Treasury bill, Eurodollar, and Treasury bond markets. The forecast power and expectational properties of the Eurodollar and Treasury bond contract prices have not appeared in previous literature. Cointegration methodology, which explicitly accounts for the nonstationarity of the data series, is used to test the parameter restrictions implied by the unbiased expectations hypothesis.